Transition to the Market Economy through Integration to the World Economy -Interaction between Domestic Reform and Opening-up-

O16

P30

The experiences in China, Central Europe and Baltic countries suggest that opening-up to trade and investment has unleashed strong forces for promoting transition to the market. International trade opportunities have expanded economic resources available for growth, and have promoted international technology transfer. They have also encouraged enterprises in transition economies to conduct business based on a long-term perspective. However, on the other hand, the experiences in Russia suggest that, when the budget constraints on enterprises remain soft, trade and investment liberalization can aggravate macroeconomic instability, and can harm domestic lending market. This is because trade liberalization in the former planned economies brings about massive changes in relative price structure, and financial market liberalization in these economies increases the domestic cost of borrowing by intensifying the effect of abolishing the monopsony power of a state with respect to domestic saving. Achieving fiscal stability should receive by far the highest priority in the reform program of those transition economies, which have not yet achieved macro-economic stability. Nevertheless, a long-term commitment for promoting and protecting trade and investment liberalization in those economies is also very important. Accession to the WTO will be one important instrument for achieving such commitment.