## _wp03239

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---

### I. INTRODUCTION — objectives and assessment of CEFTA and BFTA
- Two free-trade agreements created in the early 1990s: the Central European Free Trade Area (CEFTA) and the Baltic Free Trade Area (BFTA).
- Stated objectives:
  - Test CEECs’ capacity to work together within cooperative trade arrangements.
  - Counter growing dependence of the CEECs on EU markets by re-establishing regional trade flows.
- Assessment summary:
  - Both CEFTA and BFTA became main vehicles for regional trade liberalization during the 1990s.
  - CEFTA enlarged from an original membership of three to cover most of Central Europe.
  - BFTA did not increase membership but expanded coverage to politically sensitive areas including agriculture and fisheries.
  - Gravity-model estimates indicate both arrangements had a positive effect on regional bilateral trade.
  - Intraregional trade increased and complemented the rapid increase in trade with the EU.
  - Intraregional market shares held up well within CEFTA and actually increased in BFTA.
  - Despite regional successes, the EU remained the dominant trading partner for the CEECs.
- Context and concerns:
  - EU member states were initially skeptical about CEECs’ ability to cope with cooperative and multilateral EU structures.
  - Fear that EU accession would redirect CEEC exports towards the EU and render CEECs more vulnerable to adverse shocks from the EU (Baldwin, 1993, 1994, 1995).
- Lessons for Southeastern European Countries (SEECs):
  - SEECs did little during the 1990s to foster regional trade integration; export performance throughout the decade was extremely disappointing.
  - Conflicts in the region during the 1990s limited regional integration; conflicts subsided after the 1999 Kosovo crisis.
  - SEECs pursued a network of bilateral free-trade agreements (a “virtual” regional free-trade area) rather than a multilateral approach.
  - The paper argues SEECs should reexamine strategy and adopt a more multilateral approach.
  - Through the Stability and Association Agreements, the EU offers SEECs highly preferential trade agreements and the possibility of EU accession, but EU member states have serious doubts about SEECs’ capacity to build sustainable peaceful economic and political relations with neighbors.
  - Greater regional integration could provide a valuable test for SEECs to demonstrate capacity for closer political and economic relationships.
- Options for SEECs to develop regional integration:
  - Enlarge CEFTA to include SEECs.
  - Harmonize and further develop current bilateral free-trade arrangements to cover agriculture, services, and “behind-the-border” issues like public procurement.
  - Develop a comprehensive multilateral free-trade agreement along the lines of CEFTA and BFTA.
  - Authors’ view: a new multilateral free-trade agreement—the South East European Free Trade Area—is the most viable.

### II. TRADE LIBERALIZATION IN CENTRAL AND EASTERN EUROPEAN COUNTRIES
- Early transition reforms:
  - CEECs discarded CMEA arrangements; international trade conducted at world prices and settled in convertible currencies.
  - Tariff rates were lowered; import and export controls were abolished; licensing regimes were liberalized; foreign direct investment was permitted.
  - These reforms were accompanied by a dramatic short-term collapse in regional trade flows.
- EU accession pathway and Europe Agreements:
  - Europe Agreements prepared CEEC candidate countries for EU membership via technical assistance, legal approximation to the acquis communitaire, and financial assistance.
  - Asymmetric trade-liberalization was the main innovation: EU would eliminate trade restrictions faster than candidate countries.
  - Sensitive areas such as agriculture and textiles were exempt from Europe Agreements.
  - Europe Agreements increased both EU trade and foreign direct investment to the CEECs.
- Hub-and-spoke concern:
  - Asymmetric liberalization risked creating a “hub-and-spoke” problem diverting trade toward the EU (“hub”) and away from intra-CEEC trade (“spokes”).
  - Risked making CEECs satellites of the EU and increasing vulnerability to EU shocks; also risked limiting intra-CEEC competition.
  - Hub-and-spoke considerations encouraged CEECs to accelerate regional trade integration.
- CEFTA and BFTA formation and evolution:
  - CEFTA signed in December 1992 by Hungary, Poland, and Czechoslovakia; original members envisaged creation of an FTA by 2001.
  - BFTA signed in 1993, took effect in April 1994.
  - CEFTA progressively enlarged to include Romania, Bulgaria, Slovenia; Czech Republic and Slovakia became members as successor states to Czechoslovakia; Croatia later joined.
  - CEFTA original agreement eliminated duties on approximately 40 percent of industrial goods; additional protocols in 1994 and 1995 further liberalized trade; by 1997 CEFTA had abolished duties on all industrial goods apart from a minor list of sensitive goods.
  - BFTA expanded coverage to include agriculture and fish products by January 1997; BFTA was the first free-trade area to provide for completely liberalized trade in agricultural and food products prior to the formation of a customs union and harmonization of domestic support and foreign trade policies (Kazlauskiene and Meyers, 1999).
- Export growth statistics (1993–2001):
  - BFTA total export receipts increased by almost 400 percent.
  - CEFTA total export receipts increased by 250 percent.
  - BFTA achieved a three-fold increase in exports to the EU.
  - CEFTA achieved a two-fold increase in exports to the EU.
  - Both CEFTA and BFTA countries increased their market share within the EU over the same period.

### Intraregional trade patterns in CEFTA and BFTA
- CEFTA intraregional change:
  - Intraregional trade within the CEFTA doubled between 1993 and 2001.
  - Intraregional market share fell slightly from 11 percent to just under 10 percent.
  - Country-level intraregional performance in CEFTA:
    - Czech Republic and Slovakia experienced a significant drop in intraregional market share, primarily due to decline in bilateral trade after the dissolution of Czechoslovakia.
    - Hungary, Poland, and Romania increased their share of intraregional trade.
    - Bulgaria and Slovenia largely maintained their respective shares.
- BFTA intraregional change:
  - Between 1993 and 2001 intraregional export receipts increased four-fold.
  - Intraregional market share in BFTA increased from 8.4 percent to 9.6 percent.
- Dependence on EU markets:
  - In CEFTA, exports to the EU rose from 56 percent of total exports in 1993 to 68 percent in 2001.
  - In BFTA, exports to the EU rose from 50 percent in 1993 to 55 percent in 2001.
- Noted effect:
  - Asymmetric liberalization embedded in the Europe Agreements contributed to reorientation of CEEC trade toward the EU.

### TRADE LIBERALIZATION IN SOUTHEASTERN EUROPEAN COUNTRIES (SEECs) AND THE STABILITY PACT
- 1990s characterization:
  - The 1990s described as a "lost decade" for SEEC trade policy reform due to dissolution of the SFRY, restrictive trade regimes, varied tariff schedules, border controls, disrupted transport links, wars and international isolation.
- Regional trade outcomes for SEECs (1996–2001):
  - Total export receipts increased by 18 percent.
  - Intraregional export receipts and market share fell every year between 1997 and 2000.
  - SEECs had limited penetration into CEFTA and BFTA markets; progress mainly occurred in EU markets where export receipts increased by 31 percent during 1996–2001.
- Post-1999 Stability Pact and EU actions:
  - Stability Pact for Southeastern Europe (June 1999) prioritized trade-liberalization with a two-stage process: eliminate administrative barriers and coordinate reductions in regional trade barriers; then WTO accession and establishment of a free-trade area covering the region and the EU.
  - EU launched the Stabilization and Association Process and negotiated Stability and Association Agreements (SAAs) with SEECs, providing asymmetric trade-liberalization and Autonomous Trade Preferences (duty and quota-free access for the majority of SEEC exports, with quotas remaining on sensitive areas such as agriculture, wine, and textiles).
- Memorandum of Understanding (MoU) on trade liberalization (June 2001):
  - Targeted creation of a network of limited bilateral agreements rather than an immediate comprehensive regional FTA.
  - MoU targets: tariff rates abolished for at least 90 percent of all tariff lines; tariff liberalization to cover at least 90 percent of bilateral trade by value.
  - As of March 2003: out of 21 potential agreements, 10 fully operational, 4 signed and soon to be fully operational, and 7 initialed awaiting ratification.
  - Messerlin and Miroudot (2003) reported eleven agreements met the 90 percent targets, and seven reached 85 percent.
- Problems with the bilateral approach:
  - Risk of "spaghetti-like" arrangements: differing tariff line coverage, different liberalization timetables, excluded "behind-the-border" issues (public procurement, services).
  - 90 percent targets may be easy to meet when intraregional trade is low and concentrated in few products; agriculture remains heavily protected and is not sufficiently liberalized under these targets.
- Options for deeper regional integration in SEECs:
  1. Joining CEFTA.
  2. Harmonizing and extending current bilateral agreements, possibly via a new MoU.
  3. Creating a new regional free-trade agreement.

### ECONOMETRIC ANALYSIS (GRAVITY MODEL, 1996–2000)
- Sample and period:
  - Gravity model with 37 countries, period 1996–2000 to exclude conflicts in former Yugoslavia.
- Model variables and interpretation:
  - EXPijt = exports of country i to country j at time t.
  - GDPCAPit = real GDP per capita of country i at time t.
  - GDPCAPjt = real GDP per capita of country j at time t.
  - DISTij = distance in kilometers between the capitals of country i and j.
  - SIMijt = similarity index, bounded between 0 and 0.5 (captures Linder hypothesis and intra-industry trade).
  - Size, similarity, and proximity: larger and closer countries trade more.
  - GDP per capita differences proxy relative factor endowments; distance proxies transportation costs.
- Dummies included:
  - Europe Agreements effect on CEECs.
  - EU preferential access to the CEECs (to control for asymmetric liberalization).
  - Dummies for language, common borders, and EU membership.
  - Ex-CMEA (ex-COMECON) dummy to capture after-effects of forced CMEA trade.
- Estimation strategy and diagnostics:
  - Estimated using OLS, random effects-GLS, and fixed effects-within estimator.
  - Breusch-Pagan LM tests indicated presence of cross-section specific effects but not time-specific effects → one-way error component model; GLS preferred over pooled OLS.
  - Hausman test statistic = 134 → fixed-effects estimator preferred over GLS.
  - Two-step procedure (Hsiao 1986): within fixed-effects in first step, then cross-section regression of estimated fixed effects on time-invariant dummy variables to recover coefficients for time-invariant factors.
- Estimation results (selected points from Table 11 and text):
  - Within fixed-effects estimator chosen for interpretation; all variables had expected signs.
  - GDP per capita difference coefficient: positively signed but insignificant in within estimator.
  - Similarity index: positively signed and statistically significant at the 10 percent confidence interval.
  - Distance and ex-CMEA variables: negative and statistically significant.
  - Second-stage cross-section regression: all preferential trade agreement variables positive and statistically significant — interpreted as evidence that the agreements were trade-creating for members.
  - Relative effectiveness of agreements:
    - BFTA parameter estimate larger than CEFTA parameter estimate (BFTA more effective).
    - Europe Agreements parameter estimate smaller than CEFTA or BFTA parameters.
- Key reported estimation statistics (from Table 11):
  - R-squared: Fixed Effects 0.41; Random Effects 0.74; OLS 0.74; Second-Stage Cross Section 0.61.
  - LM1 (cross-section effects) = 9,323.57; LM2 (time effects) = 1.29.
  - Hausman statistic = 134.36.
  - Selected coefficient estimates and significance markers (as presented):
    - Constant: -30,42*** (Fixed Effects), -32,1*** (Random Effects), -30,38*** (OLS).
    - Average GDP: 1,797*** (Fixed Effects), 1,9*** (Random Effects), 1.833*** (OLS).
    - Similarity: 1,56* (Fixed Effects), 4,87*** (Random Effects), 4.801*** (OLS).
    - BFTA: 2,89*** (Random Effects), 2.69*** (OLS), 3.69*** (Second-Stage).
    - CEFTA: 0,4823*** (Random Effects), 0.825*** (OLS), 1.521*** (Second-Stage).
    - Europe Agreements: 0.201 (Random Effects), 0.13** (OLS), 0.277** (Second-Stage).
    - EU preferential access to CEEC: 0,73*** (Random Effects), 0.67*** (OLS), 0.787*** (Second-Stage).
    - Ex-COMECON: -0,442*** (Random Effects), -0.67*** (OLS), -0.245* (Second-Stage).
    - Border dummy: 1,384*** (Random Effects), 1.234*** (OLS), 1.224*** (Second-Stage).
  - Notes: t statistics are presented in parentheses in Table 11; significance denoted * 10%, ** 5%, *** 1%.

### POLICY CONCLUSIONS AND RECOMMENDATIONS
- Achievements of CEFTA and BFTA:
  - Both arrangements had a positive effect on intraregional trade and demonstrated CEECs’ capacity to develop cooperative multilateral structures.
  - CEFTA expanded membership and coverage; BFTA addressed difficult issues like agriculture and fisheries.
  - Agreements had limited effect on reducing the hub-and-spoke problem; EU remained dominant trading partner for CEECs.
- Recommendations and options for SEECs:
  - Three main options for SEECs moving forward:
    1. Southward enlargement of CEFTA (attractive for more advanced SEECs); would require relaxing CEFTA rules such as WTO membership prerequisite.
    2. Further harmonization of bilateral FTAs, possibly via a second MoU to address sensitive areas (agriculture, services, public procurement).
    3. Creation of a new comprehensive regional FTA to tackle hub-and-spoke problem and include difficult issues.
- Strategic considerations:
  - Within the next ten years there is a realistic possibility some Southeastern European countries could join the EU; the Stabilization and Association process may enable a Balkan enlargement.
  - SEECs face the same challenge the CEECs faced earlier: whether to adopt a cooperative, multilateral approach to economic policy management and strengthen regional trade as a bulwark against growing dependence on EU markets.
  - Progress toward regional trade cooperation may strengthen the case for and accelerate southward EU enlargement.

*Source: _wp03239 - References (PDF chapter/section).*

### References..............................................................................................................

### References

### I. INTRODUCTION — objectives and assessment of CEFTA and BFTA
- Two free-trade agreements created in the early 1990s: the Central European Free Trade Area (CEFTA) and the Baltic Free Trade Area (BFTA).
- Stated objectives:
  - Test CEECs’ capacity to work together within cooperative trade arrangements.
  - Counter growing dependence of the CEECs on EU markets by re-establishing regional trade flows.
- Assessment summary:
  - Both CEFTA and BFTA became main vehicles for regional trade liberalization during the 1990s.
  - CEFTA enlarged from an original membership of three to cover most of Central Europe.
  - BFTA did not increase membership but expanded coverage to politically sensitive areas including agriculture and fisheries.
  - Gravity-model estimates indicate both arrangements had a positive effect on regional bilateral trade.
  - Intraregional trade increased and complemented the rapid increase in trade with the EU.
  - Intraregional market shares held up well within CEFTA and actually increased in BFTA.
  - Despite regional successes, the EU remained the dominant trading partner for the CEECs.

- Context and concerns motivating regional arrangements:
  - EU member states were initially skeptical about CEECs’ ability to cope with cooperative and multilateral EU structures.
  - Fear that EU accession would redirect CEEC exports towards the EU and render CEECs more vulnerable to adverse shocks from the EU (Baldwin, 1993, 1994, 1995).

- Lessons for Southeastern European Countries (SEECs):
  - SEECs did little during the 1990s to foster regional trade integration; export performance throughout the decade was extremely disappointing.
  - Conflicts in the region during the 1990s limited regional integration; conflicts subsided after the 1999 Kosovo crisis.
  - SEECs pursued a network of bilateral free-trade agreements (a “virtual” regional free-trade area) rather than a multilateral approach.
  - The paper argues SEECs should reexamine strategy and adopt a more multilateral approach.
  - Through the Stability and Association Agreements, the EU offers SEECs highly preferential trade agreements and the possibility of EU accession, but EU member states have serious doubts about SEECs’ capacity to build sustainable peaceful economic and political relations with neighbors.
  - Greater regional integration could provide a valuable test for SEECs to demonstrate capacity for closer political and economic relationships.

- Options for SEECs to develop regional integration:
  - Enlarge CEFTA to include SEECs.
  - Harmonize and further develop current bilateral free-trade arrangements to cover agriculture, services, and “behind-the-border” issues like public procurement.
  - Develop a comprehensive multilateral free-trade agreement along the lines of CEFTA and BFTA.
  - Authors’ view: a new multilateral free-trade agreement—the South East European Free Trade Area—is the most viable.

### II. TRADE LIBERALIZATION IN CENTRAL AND EASTERN EUROPEAN COUNTRIES
- Early transition reforms:
  - CEECs discarded CMEA (Council for Mutual Economic Assistance) arrangements.
  - International trade conducted at world prices and settled in convertible currencies.
  - Tariff rates were lowered.
  - Import and export controls were abolished; licensing regimes were liberalized; foreign direct investment was permitted.
  - These reforms were accompanied by a dramatic short-term collapse in regional trade flows.

- EU accession pathway and Europe Agreements:
  - EU developed the Europe Agreements to prepare CEEC candidate countries for EU membership via technical assistance, legal approximation to the acquis communitaire, and financial assistance.
  - Asymmetric trade-liberalization was the main innovation: EU would eliminate trade restrictions faster than candidate countries.
  - Sensitive areas such as agriculture and textiles were exempt from Europe Agreements.
  - Europe Agreements increased both EU trade and foreign direct investment to the CEECs.

- Hub-and-spoke concern:
  - Asymmetric liberalization risked creating a “hub-and-spoke” problem diverting trade toward the EU (“hub”) and away from intra-CEEC trade (“spokes”).
  - Risked making CEECs satellites of the EU and increasing vulnerability to EU shocks; also risked limiting intra-CEEC competition.
  - Hub-and-spoke considerations encouraged CEECs to accelerate regional trade integration.

- CEFTA and BFTA formation and evolution:
  - CEFTA signed in December 1992 by Hungary, Poland, and Czechoslovakia; original members envisaged creation of an FTA by 2001.
  - BFTA signed in 1993, took effect in April 1994.
  - CEFTA progressively enlarged to include Romania, Bulgaria, Slovenia; Czech Republic and Slovakia became members as successor states to Czechoslovakia; Croatia later joined.
  - CEFTA original agreement eliminated duties on approximately 40 percent of industrial goods; additional protocols in 1994 and 1995 further liberalized trade; by 1997 CEFTA had abolished duties on all industrial goods apart from a minor list of sensitive goods.
  - BFTA expanded coverage to include agriculture and fish products by January 1997; BFTA was the first free-trade area to provide for completely liberalized trade in agricultural and food products prior to the formation of a customs union and harmonization of domestic support and foreign trade policies (Kazlauskiene and Meyers, 1999).

- Export growth statistics (1993–2001):
  - Between 1993 and 2001, BFTA total export receipts increased by almost 400 percent.
  - Between 1993 and 2001, CEFTA total export receipts increased by 250 percent.
  - Between 1993 and 2001, BFTA achieved a three-fold increase in exports to the EU.
  - Between 1993 and 2001, CEFTA achieved a two-fold increase in exports to the EU.
  - Both CEFTA and BFTA countries increased their market share within the EU over the same period.

*Source: _wp03239 - References (PDF chapter/section).*

### 0.11 percent to 0.26 percent, while the CEFTA increased its market share from 2.13 percent

### _wp03239 - 0.11 percent to 0.26 percent, while the CEFTA increased its market share from 2.13 percent

### Intraregional trade patterns in CEFTA and BFTA
- Intraregional trade within the CEFTA doubled between 1993 and 2001, while intraregional market share fell slightly from 11 percent to just under 10 percent.
- Country-level intraregional performance in CEFTA:
  - Czech Republic and Slovakia experienced a significant drop in intraregional market share, primarily due to decline in bilateral trade after the dissolution of Czechoslovakia.
  - Hungary, Poland, and Romania increased their share of intraregional trade.
  - Bulgaria and Slovenia largely maintained their respective shares.
- BFTA intraregional performance:
  - Between 1993 and 2001 intraregional export receipts increased four-fold.
  - Intraregional market share in BFTA increased from 8.4 percent to 9.6 percent.
- Despite CEFTA and BFTA sustaining and developing intraregional trade, CEECs became increasingly dependent on EU markets:
  - In CEFTA, exports to the EU rose from 56 percent of total exports in 1993 to 68 percent in 2001.
  - In BFTA, exports to the EU rose from 50 percent in 1993 to 55 percent in 2001.
- Asymmetric liberalization embedded in the Europe Agreements contributed to reorientation of CEEC trade toward the EU.

### Trade liberalization in Southeastern European Countries (SEECs) and the Stability Pact
- The 1990s were described as a "lost decade" for SEEC trade policy reform due to:
  - Dissolution of the SFRY, introduction of restrictive trade regimes, varied tariff schedules, border controls, and disrupted transport links.
  - Wars and international isolation (notably Croatia and Serbia) that prevented preferential trade agreements with the EU and hampered regional trade rehabilitation.
- Regional trade outcomes for SEECs (1996–2001):
  - Total export receipts increased by 18 percent.
  - Intraregional export receipts and market share fell every year between 1997 and 2000.
  - SEECs had limited penetration into CEFTA and BFTA markets; progress mainly occurred in EU markets where export receipts increased by 31 percent during 1996–2001.
- Post-1999 Kosovo crisis developments:
  - The Stability Pact for Southeastern Europe (June 1999) prioritized trade-liberalization for post-conflict recovery, with a two-stage process: eliminate administrative barriers and coordinate reductions in regional trade barriers; then WTO accession and establishment of a free-trade area covering the region and the EU.
  - The EU launched the Stabilization and Association Process and negotiated Stability and Association Agreements (SAAs) with SEECs, providing asymmetric trade-liberalization and Autonomous Trade Preferences (duty and quota-free access for the majority of SEEC exports, with quotas remaining on sensitive areas such as agriculture, wine, and textiles).
- Memorandum of Understanding (MoU) on trade liberalization (June 2001):
  - Targeted creation of a network of limited bilateral agreements rather than an immediate comprehensive regional FTA.
  - MoU targets: tariff rates abolished for at least 90 percent of all tariff lines; tariff liberalization to cover at least 90 percent of bilateral trade by value.
  - As of March 2003: out of 21 potential agreements, 10 fully operational, 4 signed and soon to be fully operational, and 7 initialed awaiting ratification.
  - Messerlin and Miroudot (2003) reported eleven agreements met the 90 percent targets, and seven reached 85 percent.
- Problems with the bilateral approach:
  - Risk of "spaghetti-like" arrangements: differing tariff line coverage, different liberalization timetables, excluded "behind-the-border" issues (public procurement, services).
  - 90 percent targets may be easy to meet when intraregional trade is low and concentrated in few products; agriculture remains heavily protected and is not sufficiently liberalized under these targets.
- Options for deeper regional integration in SEECs:
  1. Joining CEFTA.
  2. Harmonizing and extending current bilateral agreements, possibly via a new MoU.
  3. Creating a new regional free-trade agreement.

### Econometric analysis (gravity model, 1996–2000)
- Sample and period:
  - Gravity model with 37 countries (primarily OECD, Eastern European and CIS countries), period 1996–2000 to exclude conflicts in former Yugoslavia.
- Model specification (functional form retained as presented):
  - EXPijt = exports of country i to country j at time t.
  - GDPCAPit = real GDP per capita of country i at time t.
  - GDPCAPjt = real GDP per capita of country j at time t.
  - DISTij = distance in kilometers between the capitals of country i and j.
  - SIMijt = similarity index (captures Linder hypothesis and intra-industry trade), defined and bounded between 0 and 0.5.
- Key explanatory concepts:
  - Size, similarity, and proximity: larger and closer countries trade more.
  - GDP per capita differences proxy relative factor endowments (capital-labor ratios).
  - Distance proxies transportation costs.
  - Similarity index constructed to capture similarity in output and intra-industry trade.
- Dummies included:
  - Europe Agreements effect on CEECs.
  - EU preferential access to the CEECs (to control for asymmetric liberalization).
  - Dummies for language, common borders, and EU membership.
  - Ex-CMEA (ex-COMECON) dummy to capture after-effects of forced CMEA trade.
- Estimation strategy and tests:
  - Estimated using OLS, random effects-GLS, and fixed effects-within estimator.
  - Breusch-Pagan LM tests indicated presence of cross-section specific effects but not time-specific effects → one-way error component model; GLS preferred over pooled OLS.
  - Hausman test statistic = 134 → fixed-effects estimator preferred over GLS.
  - Two-step procedure (Hsiao 1986): within fixed-effects in first step, then cross-section regression of estimated fixed effects on time-invariant dummy variables to recover coefficients for time-invariant factors.
- Estimation results (summary points from Table 11 and text):
  - Within fixed-effects estimator chosen for interpretation; all variables had expected signs.
  - GDP per capita difference coefficient: positively signed but insignificant in within estimator.
  - Similarity index: positively signed and statistically significant at the 10 percent confidence interval (supporting Linder hypothesis and prevalence of intra-industry trade).
  - GLS and OLS preliminary results: all but one preferential trade agreement dummy positive and statistically significant; Europe Agreements was positive but statistically insignificant in GLS.
  - Distance and ex-CMEA (ex-COMECON) variables: negative and statistically significant.
  - Second-stage cross-section regression: all preferential trade agreement variables positive and statistically significant → interpreted as evidence that the agreements were trade-creating for members.
  - Relative effectiveness:
    - BFTA parameter estimate larger than CEFTA parameter estimate (BFTA more effective).
    - Europe Agreements parameter estimate smaller than CEFTA or BFTA parameters, suggesting much of EU-CEEC trade increase reflected a return to normal trading patterns rather than unique advantages from Europe Agreements.
  - Language dummy: insignificant in second-stage; ex-CMEA dummy: negative and significant at 10 percent.
- Additional experiments and diagnostics:
  - Cross-section time-series of coefficients for trade agreements (1996–2000) showed coefficients mostly smooth and stable except Europe Agreements variable, which was initially negative but became positive thereafter.
  - Poolability test F-statistic = 0.60 < F-critical 1.5 at one percent → coefficients equal across time; however, t statistic comparing 1996 vs 2000 Europe Agreements coefficient = -3.31 → reject equality, indicating increasingly positive Europe Agreements effect over time.
- Key reported estimation statistics (from Table 11):
  - R-squared values reported: Fixed Effects 0.41; Random Effects 0.74; OLS 0.74; Second-Stage Cross Section 0.61.
  - LM1 (cross-section effects) = 9,323.57; LM2 (time effects) = 1.29.
  - Hausman statistic = 134.36.
  - Significant coefficients (examples from Table 11 row labels and significance stars as presented):
    - Constant: -30,42*** (Fixed Effects), -32,1*** (Random Effects), -30,38*** (OLS).
    - Average GDP: 1,797*** (Fixed Effects), 1,9*** (Random Effects), 1.833*** (OLS).
    - Similarity: 1,56* (Fixed Effects), 4,87*** (Random Effects), 4.801*** (OLS).
    - BFTA: 2,89*** (Random Effects), 2.69*** (OLS), 3.69*** (Second-Stage).
    - CEFTA: 0,4823*** (Random Effects), 0.825*** (OLS), 1.521*** (Second-Stage).
    - Europe Agreements: 0.201 (Random Effects), 0.13** (OLS), 0.277** (Second-Stage).
    - EU preferential access to CEEC: 0,73*** (Random Effects), 0.67*** (OLS), 0.787*** (Second-Stage).
    - Ex-COMECON: -0,442*** (Random Effects), -0.67*** (OLS), -0.245* (Second-Stage).
    - Border dummy: 1,384*** (Random Effects), 1.234*** (OLS), 1.224*** (Second-Stage).
  - Notes: t statistics are presented in parentheses in Table 11; significance denoted * 10%, ** 5%, *** 1%.

### Policy conclusions and recommendations
- CEFTA and BFTA achievements:
  - Both arrangements had a positive effect on intraregional trade and demonstrated CEECs’ capacity to develop cooperative multilateral structures.
  - CEFTA expanded membership and coverage; BFTA addressed difficult issues like agriculture and fisheries.
  - Agreements had limited effect on reducing the hub-and-spoke problem; EU remained dominant trading partner for CEECs.
- Lessons and options for SEECs:
  - SEECs completed a network of bilateral FTAs under the MoU, but further progress likely requires a more multilateral approach.
  - Three main options for SEECs moving forward:
    1. Southward enlargement of CEFTA (attractive for more advanced SEECs); would require relaxing CEFTA rules such as WTO membership prerequisite.
    2. Further harmonization of bilateral FTAs, possibly via a second MoU to address sensitive areas (agriculture, services, public procurement).
    3. Creation of a new comprehensive regional FTA to tackle hub-and-spoke problem and include difficult issues.
- Strategic considerations:
  - Within the next ten years there is a realistic possibility some Southeastern European countries could join the EU; the Stabilization and Association process may enable a Balkan enlargement.
  - SEECs face the same challenge the CEECs faced earlier: whether to adopt a cooperative, multilateral approach to economic policy management and strengthen regional trade as a bulwark against growing dependence on EU markets.
  - Progress toward regional trade cooperation may strengthen the case for and accelerate southward EU enlargement.

*Source: IMF working paper content as provided in the supplied PDF excerpt.*

### REFERENCES

### REFERENCES

### References list
- Adam, A., and T. Moutos, 2002, “The Political Economy of EU Enlargement or Why Japan Is Not A Candidate Country,” CESifo Working Paper, No.704 (7).
- Baldwin, R.E., 1993, “A Domino Theory of Regionalism,” NBER Working Paper No.4465.
- ———, 1994, “Towards an Integrated Europe,” CEPR, London.
- ———, 1995, “The Eastern Enlargement of the European Union,” European Economic Review, (39), p. 474–481.
- ——— J. Francois and R. Portes, 1997, “The Costs and Benefits of Eastern Enlargement: The Impact on EU and Central Europe,” Economic Policy, (10), p.127–176.
- Baltagi, B., 1995, “Econometric Analysis of Panel Data,” New York: John Wiley and Sons.
- Byers, J.A., 1999, “Great Circle Distances,” available on the Internet at: http://www.wcrl.ars.usda.gov/cec/moregen.htm, Western Cotton Research Laboratory, Phoenix, AZ.
- Choi, E. K., 2002, “Trade and the Adoption of a Universal Language,” International Review of Economics and Finance, (11), p.265–275.
- Christie, E., 2002, “Potential Trade in Southeast Europe: A Gravity Model Approach,” WIIW Working Papers No. 21.
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*Source: _wp03239 - REFERENCES*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2003/_wp03239.pdf_