The terms-of-trade effects from the elimination of state trading in Soviet - Hungarian trade

Economists have debated whether the Soviet Union subsidized trade with its Eastern European partners in the Council of Mutual Economic Assistance (CMEA). Effective January 1, 1991, former CMEA members implemented their"switchover"decision to convert to world market prices denominated in convertible currency. The switchover dramatically reduced the role of"state trading"by permitting direct enterprise to enterprise transactions denominated and settled in convertible currency. The authors made an intensive study of the trading relationship between Hungary and the Soviet Union as a case study on the terms-of-trade issue. A detailed empirical investigation of prices in Soviet-Hungarian trade before and after the switchover provides some indication of the terms-of-trade loss that Hungary is likely to suffer as a result of the switchover of its trading relationship with the Soviet Union. Contrary to conventional wisdom, the authors find that the majority of Hungarian firms exporting to the Soviet Union have been disfavored by the combination of the payments mechanism, exchange rate, tax and subsidy policies. The experience of early 1991 suggests a significant decline is likely to occur in Soviet imports from Hungary during the remainder of the year. A variety of problems account for the decline, many of them specific to internal conditions in the Soviet Union.Environmental Economics&Policies,Economic Theory&Research,Access to Markets,Markets and Market Access,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT