Creating the reform resistant dependent economy : the CMEA international trading relationship

In this report the authors analyze the CMEA trading relationship using the standard concepts of 1) specialization in accord with comparative advantage, and 2) the incentives to resist trade liberalization because of rents accruing to industry specific factors of production (including job security that sustains hidden unemployment). These concepts permit a demonstration of how the CMEA system of international trade sustained a dependence relationship between the Eastern European economies and the Soviet Union that inhibited market oriented liberalization and adjustment. The authors focus on Poland and Hungary and in describing and analyzing the implications of CMEA trading relationship, they use conceptions and models that are well known from the theory of international trade and the theory of the firm. In conclusion, abolition of the CMEA trading system and a change to trade at world prices eliminates the terms of trade advantage of the Eastern European economies. The terms of trade loss and the writing down of the value of the CMEA capital stock are not independent or additive costs of the end of the CMEA system of international trade, but will have been linked via capitalization of the preferential terms of trade into the value of the CMEA transaction specific capital.