chapter  2
24 Pages

The Political Economy of External Transformation

WithBen Slay

The political economy of developing new aggregate trade strategies is somewhat clearer, as is the interplay of geopolitical opportunities and constraints in terms of international economic diplomacy. A separate set of issues is associated with the political economy of choosing between fixed and floating exchange regimes. The domestic political economy implications are likely to be at least as significant as geopolitical factors in determining die balance struck between liberalization and protection in the planned economies in transition (PETs). Important tensions are apparent in the interplay between external transformation and privatization. External transformation, therefore, requires breaking the administrative barriers separating production from trade. External transformation requires changes in overall trade policy, trade liberalization, financial instruments, and currency convertibility. Floating against currencies of other PETs would also remove the exchange rate distortions inherited from the traditional mechanism, and this would facilitate the rationalization of trade among the former Council for Mutual Economic Assistance countries.