Transcript lect11

Lecture 11. Assessment of
Reforms
Lecture outline
• Basic macroeconomic indicators
– GDP
– Unemployment
– Productivity
– Investment
– Inflation
• Impediments to growth in less successful
economies
• Perceptions, measures of (un)happiness
Evolution of GDP
• U-shaped pattern from the beginning of
transition
• Decline lasted from 2 to 4 years
• Decline ranged from 20% (Poland) to 60%
(Ukraine)
• Causes: reporting incentives, reallocation
of resources, disorganization, uncertainty
about property rights, political situation
Productivity and employment
• Employment: decline and then stabilization
• Unemployment: almost mirror image of
employment, but not completely (why not?)
• Why did labor participation rates decline?
– Rates were too high in STE’s (a lot of wasted labor)
– Usually decline in downturns (people get discouraged
from looking for jobs)
• Productivity: U-shaped, but the initial drop is
much smaller than for GDP
Investment
• Sharp decline (except in Poland and
Slovakia)
• Reasons:
– In order to have investment, you must have
savings or resources (foreign or domestic)
– Investment rates were too high in STE’s
– Uncertainty
– Much of investment would not be counted as
such (retraining, establishing new networks, etc.)
Inflation
• High at the beginning of reforms,
moderating later
• IMF and many western economists are too
preoccupied with inflation (Russia had it
under control right up to the 1998 financial
crisis and default)
• Countries should fight causes of inflation
not inflation as a symptom
Impediments to growth
• Slow enterprise restructuring
• Poor enforcement of property rights and
contracts
• Corruption
• Economic and political uncertainty
• External debt
Indicators of well-being
• Life expectancy and infant mortality
• Contradictory data
• Life expectancy: dropped (esp. among
males) but then recovered somewhat
• Reasons?
• Infant mortality in Russia has increased,
but not as much as it did in the US Great
Depression
Male Life Expectancy at Birth in ex-Communist countries, years, 1989-98
1991
1992
1993
1994
1995
1997
1998
Years
Lost
Lost –
Rec-d
Russia
63.0
7
61.7
0
58.4
2
57.1
9
57.6
8
60.5
7
61.1
2
6.48
2.55
Ukraine
64.2
9
63.4
4
62.7
5
62.0
1
60.8
6
59.9
3
60.0
8
5.80
5.65
Belarus
65.5
0
64.9
3
64.0
6
63.7
9
63.1
3
62.4
8
62.2
6
4.48
4.48
Estonia
64.1
3
63.5
3
62.5
5
61.0
5
61.7
2
62.3
8
62.7
1
4.68
3.02
Latvia
63.2
6
62.5
7
61.6
1
60.7
2
60.7
6
61.4
3
61.7
8
4.45
3.39
Lithuania
65.1
8
64.8
7
63.2
4
62.5
8
61.9
4
62.6
1
62.7
6
4.81
3.99
Poland
66.1
9
66.7
9
67.4
5
67.5
8
67.7
6
68.7
2
68.8
2
0.57
-2.06
Czech
68.2
3
68.5
6
69.3
0
69.5
5
69.7
4
70.5
2
70.6
8
no decline
Slovakia
66.7
9
67.11
67.7
9
68.3
4
68.3
6
68.8
3
69.1
2
no decline
Economies in transition and the
current crisis
• The crisis affected Eastern and Central Europe
(EE and CE) and former Soviet Union (FSU)
more than other world regions
• 2009 drop in GDP was about 4% on average
• Countries that have performed worst in the
crisis: former Soviet republics, except Russia
(esp. Ukraine, Latvia, and Estonia)
• Countries that performed best: East European
members of EU and Russia
• What are the reasons for the severity of the
decline?
Nature of growth prior to the
crisis
• Economies in transition benefited from
market reform (liberalization, privatization,
reform of institutions)
• EE economies, including Russia and
Ukraine, had been growing at 7-8%/year
prior to crisis
• However, problems were accumulating,
particularly in 2006-2008
Problems of pre-crisis growth
• Many economies in transition experienced sharp
increases in consumption and investment
financed in large part by foreign capital
• Private entities (esp., banks) and individuals
borrowed large amounts from foreign sources
• Foreign capital in-flows were particularly
significant in countries that formally or informally
pegged their currencies to the US$ or the Euro
(Estonia, Latvia, Lithuania, Belarus, Russia,
Ukraine, and Bulgaria)
The initial impact of the crisis
• When the crisis began, foreign capital fled to the
safety of the main world currencies and credit
froze up, making it difficult for the borrowers to
roll over debt
• This and other factors generated significant
pressure to devalue EE and CE currencies
• Cheaper currency helps exporters but banks
had to pay back loans to foreign lenders in hard
currency while their revenues were in
depreciated domestic currencies
The initial impact of the crisis
(cont.)
• Also, generally high levels of private debt
(as well as public debt in Hungary and in
Romania) combined with lower demand
for goods and services meant that
borrowers had difficulties repaying debt
• Demand could have been increased if
currencies were sufficiently devalued, but
governments were afraid to do that to
avoid bankrupting the banks
Additional features of crisis in
economies in transition
• Some countries (e.g., Russia) made
significant spending commitments during
the high growth years that contributed to
budget deficits during the crisis
• However, these spending commitments
might have helped maintain aggregate
demand and were helpful as long as the
country’s budget was in reasonable shape
• Little political turmoil despite hardships