General Overview

n the Eastern Europe and Central Asia region, the Russian Revolution of 1917 interrupted the
region's long history as a major player in international trade. For almost 50 years, the region
remained basically isolated from the global marketplace while the central planning system
dictated the flow of goods and services by administrative fiat, mainly within the Soviet
bloc. These flows were mediated through one currency and under common laws and
regulations.

When the central planning system disintegrated in the 1980s, the situation changed
radically. Almost overnight, trade flows encountered new national boundaries, new currencies
and taxes, customs authorities and border procedures. At the same time, production and
marketing decisions confronted consumer demands, and the region's trade with the rest of the
world now faced global market forces.

Today, most of the countries in the region have significantly re-integrated with the global
economy. Exports have tripled and imports increased two and a half times since the dismantling
of the Soviet trade bloc. Eighteen of the 29 countries have become members of the World Trade
Organization(WTO) and the majority of the others are in various stages of accession. Eight have
achieved membership in the European Union (EU8) - the Czech Republic, Estonia, Hungary,
Latvia, Lithuania, Poland, the Slovak Republic and Slovenia. Where implemented, the
establishment of liberal trade regimes have yielded a faster pace of trade growth since the 1990s
than any other region worldwide and helped to propel growth.

However, the record across the region is far from uniform. Some countries in the region remain
relatively isolated from the global economy and dependent on a few primary commodity exports
left over from the Soviet era structure of production. Their exports remain concentrated within the
region and they risk being increasingly frozen out of the international market place.


Regional Challenges

Although the region has largely reduced barriers to external trade, and has made
substantial progress in opening up to foreign investment, a host of secondary challenges remain
that can hinder the impact of these reforms on growth and poverty reduction. These include:
behind-the-border policies that hinder investment; a spaghetti bowl of trade agreements which
create complexities for traders and investors; and numerous border and transit disputes which
stymie the flow of goods especially to landlocked countries. n addition, the region now faces the
challenge of liberalizing trade in services, the fastest growth segment of the world trade flows.

"Behind-the-border" poIicies are as critical to a country's investment climate as its external
trade policies. These include regulations and institutions overseeing local and foreign
investment, capital markets, customs, taxation, labor, private ownership, legal recourse, and so
on. Many transition states have yet to achieve a reasonably level playing field for private
investors both domestic and foreign that can allow resources to be allocated efficiently in
pursuit of opportunities in the global economy. For example, in a number of countries, key export
sectors remain dominated by state participation (despite large scale privatization programs) and
face issues in terms of governance, pricing, financing,

myriad of regionaI free trade agreements and customs unions have been formed, e.g. 39
bilateral free trade areas in South Eastern Europe (SEE) and among the CS countries. However,
these have become enormously complex, focusing heavily on the exchange of trade preferences
and hindering commercial decisions by traders and investors. A main challenge is how to
rationalize this "spaghetti bowl into region-wide arrangements, and to increase multilateral
cooperation on related issues such as transit facilitation and liberalization of trade in services.

The political tensions associated with the establishment of new states in Eastern Europe
and Central Asia has also yielded numerous border and transit disputes that hinder the free
flow of goods within and beyond the region. These are particularly crucial for the many land-
locked states in the region. Additionally, some countries maintain remnants of the Soviet-era
restrictions on the physical movement of both people and goods, such as internal transit
checkpoints, which create rigidities even inside domestic boundaries and raise the costs of
delivering goods to market.

Finally, reforming the service sector is a further regional challenge as it can deliver greater and
more sustainable growth. Service industries have emerged as a dynamic force in economic
growth in the EU8 and SEE countries. Telecommunications, transportation, banking, and tourism
are some of the big revenue generating sectors that have been core targets of reform. However,
new, higher technology sectors, are now beginning to emerge within the region


The world bank`s stratergy

The World Bank's work on trade and integration in Eastern Europe and Central Asia has two
main objectives - to support countries efforts to grow by expanding trade with the global
economy, and to assist their efforts to integrate with larger markets such as the European
Union.

At the country IeveI, the World Bank supports provides
O analytical work, such as Trade Diagnostic Studies that examine a country's trade policies,
behind-the-border policies and institutions that facilitate trade, and its international
competitiveness both at the national level and in key industries; and Strategy Papers
focussed on trade, investment and integration;
O :idance and s:55ort for 5olicy reforms, through Development Policy loans and credits;
O and technical assistance and investment financin to build and strengthen institutions
that facilitate trade and integration, such as the Russian Federation - Customs
Development Project.
At the regionaI IeveI, the World Bank works closely with the European Union and principal
European development institutions to ensure that the reforms, investments and other
interventions that the Bank supports are aligned with the acq:is comm:nitaire requirements for
those countries seeking accession, and with the EU's Neighbourhood Policy. Within the region,
the World Bank also supports deepening of cooperation on trade and other issues through
various sub-regional intitiatives such as the trade facilitation program and through the preparation
of region-wider reports, such as the recent Deeper ntegration and Trade in Services in the Euro-
Mediterranean Region.

At the gIobaI IeveI, the World Bank advocates changes in the world trading system to make it
more supportive of development, as well as working directly with individual countries as they
pursue accession to the WTO.