Introduction

Integration of the previously centrally planned countries into the international economy has presented some of the most difficult challenges of transition to the market. State control of trade and foreign exchange, vastly distorted prices, and insufficiently developed financial institutions left countries in East-Central Europe and the former Soviet Union ill prepared to participate and benefit from international trade and finance. At the same time, their governments realized that without integration into the international economy, the transition to a market system would never be complete or successful.

In 1990, Peter Kenen prepared a report for the IMF that focused on the implications of price liberalization and moving to international prices and convertible currencies for trade and financial relationships among the countries of East-Central Europe that were members of the soon-tobe-defunct CMEA (Kenen 1991). He concluded that the needed economic reforms would worsen these countries' terms of trade and drive them into a current-account deficit with the USSR. He recommended the extension of medium-term financing from the USSR to individual countries and additional external financing from the international community to cope with the terms of trade shock.

In 1992, the USSR itself collapsed and in its place fifteen new countries emerged, all proceeding with price liberalization and moving to international prices and convertibility at a different pace.

De Melo, Panagariya and Rodrik's Chapter 6 serves admirably to provide the intellectual background to the pressing issues of regional integration (RI) to which it is devoted. Starting with the celebrated work of Viner (1950) on the ‘customs union issue’ the last four decades have seen an extensive body of research on the theory and experience of ‘partial’ or ‘limited’ free trade on a ‘preferential’ basis. This literature is lucidly surveyed in section 2 of the chapter. Section 3, which is the most original, opens up some very interesting and novel issues concerned with the institutional dimensions of RI. Section 4 presents new empirical results on evaluating the growth effects of several RI efforts. Altogether this is an extremely meaty and substantive study, not so much one chapter by three authors as one chapter by each of three authors, skilfully blended together. Its value to the profession, in my opinion, will not be confined to the participants of the CEPR/World Bank conference alone.

My comments will be in three parts. The first will be addressed to the survey of the literature in section 2 of the chapter. The second will be concerned with the political economy issues raised by section 3 on the institutional dimensions of RI arrangements. The last will consist of some observations on the broader themes of RI and trade policy raised in this and other chapters in the volume.