[Index]
2002 – Transition economies: considerable
risks
due to the global downturn
UNECE releases its Economic Survey of
Europe, 2001 No. 2
Geneva, 15 November
2001
"Given the depth and scope of the present global
downturn, the ECE transition economies are facing increasing downside
risks" says Paolo Garonna, Acting Executive Secretary of the United
Nations Economic Commission for Europe (UNECE) commenting on the new issue of
the Economic Survey of Europe, 2001 No. 2. "Economic policy in the
transition economies should try to counter weakening cyclical growth forces,
but the extent to which this is possible will vary among countries. Due to the
existing policy constraints, many of these countries will find it difficult to
cope with the negative consequences of the external shock on their own. Policy
measures undertaken in the transition economies should complement and
strengthen a broader policy response to recessionary forces in western Europe
and overseas."
Strong performance in 2001…
In the course of 2001, the ECE transition economies
generally showed some resilience in the face of a deteriorating international
environment. Due to the lags in the transmission of trade effects, the
immediate impact of the global slowdown on eastern Europe and the CIS has so
far been much less pronounced than on western Europe. During the first half of
the year output remained relatively robust in many transition economies and
growth even accelerated in some countries, especially in the CIS. Although
this outcome looks outstanding against the background of a rapid general
slowdown in the world economy, its significance should not be overstated. All
the ECE transition economies are highly dependent on their international
markets and the sharp deterioration in world market conditions will, sooner or
later, start to take its toll – the varying lags depending on the specific
transmission channels.
The Russian economy has been the main support of the
continuing recovery in the Commonwealth of Independent States. Much of Russia’s
present economic strength is due to the effects of the ongoing restructuring
of the economy after the 1998 financial crisis and, especially, the
comprehensive reforms initiated by the current administration. The presently
prevailing sense of political stability – after a decade of volatility and
frequent changes of government – has also contributed to an improving
business climate in the country. In addition, the Russian authorities have
adopted a more forward-looking approach to policy, which has had a positive
effect on business and consumer confidence and expectations in general.
As a result, and contrary to the situation in previous
cases of global turmoil, the CIS as a whole so far was less affected by the
immediate impact of the global economic downturn. In the present
circumstances, the fact that intra-CIS trade still accounts for a significant
share of the total trade of most of these countries provided some insulation
from weakening demand in the rest of the world. The continuing strong recovery
not only in Russia but in some of the other large economies in the
Commonwealth (Ukraine and Kazakhstan) provided a source of growth for the rest
of the CIS during much of 2001.
… but downside risks are growing fast, especially in
eastern Europe, …
The continuing weakening in the global economy presents a
serious challenge for all the transition economies but the immediate risks are
especially pronounced for the countries of eastern Europe and the Baltic area.
While the central European and the Baltic economies have made substantial
progress towards establishing functioning market economies and strengthening
their institutions, they are extremely dependent on trade with western Europe.
Most of the south-east European transition economies – which are generally
lagging behind in the reform process – still suffer from chronic weaknesses
while at the same time also being rather dependent on west European markets.
In the present circumstances this combination increases their susceptibility
to external disturbances. Thus, if the west European downturn intensifies, the
adverse consequences for eastern Europe and the Baltic area could be
considerable. The manufacturing sector of these transition economies, which
relies heavily on exports, is most exposed to such risks and would be the
first to be affected; however, the negative repercussions would be
wide-ranging and overall economic performance can be expected to suffer as
well.
Somewhat surprisingly, the escalating global economic risks
have not so far triggered major revisions to the official growth forecasts in
eastern Europe (with the possible exception of Poland where the deterioration
in output was mostly driven by domestic factors). It was only after the
terrorist attacks on the United States on 11 September that some warnings were
made about the possible economic fallout in the region. Nevertheless, as of
early autumn, and despite some modest downward revisions of forecasts in some
countries (apart from Poland, these included Bulgaria, Croatia, Hungary,
Slovenia, Estonia and Latvia), governments remained generally optimistic about
their short-term prospects despite the persistent lowering of output forecasts
in western Europe. Thus, according to the official October forecasts for the
year 2002, aggregate GDP was still expected to grow by some 3.5 per cent
in eastern Europe and by close to 5 per cent in the Baltic states (table
1.2.1).
One important reason for the absence of specific policy
responses to an eventual slowdown may be the fact that policy makers in most
transition economies have fairly limited degrees of freedom to design and
implement such measures. Among the policy constraints these countries are
facing are the existing macroeconomic imbalances such as current account and
fiscal deficits. Moreover, these imbalances are likely to increase as a result
of the global slowdown because of various factors such as different rates of
adjustment of exports versus imports in response to the global downturn or
insufficient flexibility of product or factor markets.
Another policy constraint stems from the rigid monetary
regimes to which some countries adhere (such as the currency boards in Bosnia
and Herzegovina, Bulgaria, Estonia and Lithuania or the fixed exchange rate
regime in Latvia). Such regimes preclude the use of monetary policy to cushion
the economy from an external shock. In principle, a rigid monetary regime such
as a currency board implies that the external shock is fully absorbed by the
real economy which, in turn, requires a sufficient degree of flexibility on
the labour and product markets. Thus, an aggravation of the current economic
situation will provide a test not only of the degree of flexibility of markets
in these countries but also of the stability of their monetary regimes in the
event of an external shock.
Among the advanced reformers, Hungary and Slovenia, which
in recent years have enjoyed balanced growth and adhere to more flexible
monetary regimes, appear to have more room for engaging in activist policies
in response to a deteriorating external environment. With both external and
internal balances broadly in check, a moderately expansionary policy would
seem to be the proper response to an external shock. However, even in these
countries the current macroeconomic equilibrium is rather delicate and much
policy caution would be needed to avoid upsetting it. Slovakia and to a lesser
extent the Czech Republic are facing some difficulties in keeping their
macroeconomic balances under control: the latter is currently coping with a
fiscal shock caused by the bailout of several large banks, while the former
has been trying to scale down an ambitious public investment programme that
has led to a dangerous escalation of both external and domestic imbalances.
The policy response in such cases will have to be much more cautious and
selective, avoiding measures that could further destabilize the macroeconomy.
Poland is in an even weaker position due to the current fiscal crisis;
possible counter-cyclical measures may only be envisaged in the context of an
internal restructuring of an already shrinking government budget. The three
Baltic states as well as Bulgaria adhere to rigid monetary regimes which, as
noted above, leave very little, if any, degrees of freedom to policy makers to
undertake counter-cyclical measures. At the same time, as indicated by past
experience (for example in the aftermath of the Russian crisis in 1998), they
are highly susceptible to external shocks. These economies are now exposed to
a double risk: first, the extent to which they may be affected by an external
shock and, second, whether the real economy can absorb it without jeopardizing
macroeconomic stability. Most of the remaining south-east European transition
economies also have limited room for manoeuvre due to their overall
macroeconomic instability.
… and, with some lags, in the CIS as well.
"The immediate downside risks for the Commonwealth of
Independent States are probably not so high; as long as the Russian economy
continues to grow the direct negative repercussions of the global downturn on
the rest of the CIS will be partly offset" stresses Paolo Garonna. In
fact, while the Russian authorities envisage some slowdown in the rate of
growth in the short run (the draft budget for 2002 submitted to the Duma assumes a 4.3 per cent rate of GDP growth), the prevailing expectation is
that output will remain relatively strong in the medium term.
However, it should also be borne in mind that the main
source of growth in Russia – and, indirectly, in much of the CIS as a whole
– is the continuing strong recovery in Russian final domestic demand, in
particular, private consumption. In turn, this has been largely driven by the
windfall revenue gains due to the relatively high world oil prices in 2000 and
part of 2001. Thus, in assessing Russia’s short-term economic prospects, the
main issue is whether and to what extent this domestic demand-led growth is
sustainable. If world oil prices were to follow the downward trend in the
global economy (as suggested by their direction in autumn 2001), a key
stimulus to growth in Russia and the CIS could soon peter out. In addition,
the continuing real appreciation of the Russian rouble has already eroded much
of the post-1998 competitive gains – acquired from the sharp real
depreciation that followed the August 1998 financial collapse – which had
given an additional boost to the economy (mainly through its stimulus to
import substitution). In these circumstances, Russia’s currently good
economic fundamentals would be unable to continue to support the growth of
real incomes and private consumption at their present pace; or, to put it
differently, if such a pattern of domestic demand-led growth were to continue,
it would probably be at the expense of macroeconomic stability.
The most important external influence on the continuation
of recovery, not only in Russia but in the whole of the CIS, is the direction
of world commodity prices. These economies can probably weather a temporary
drop in world oil prices and, actually, some governments in the region have
been preparing for such a turn. Thus, some of the CIS oil exporting countries
(Azerbaijan, Kazakhstan and Russia) have already instituted, or are in the
process of doing so, special off-budgetary reserve funds, which accumulate
some of the windfall revenue in periods of boom. When conditions reverse, some
of the accumulated resources may be used as a cushion against the shock.
However, as this is a relatively recent development, the reserve funds have
not yet accumulated sufficient resources to cope with a prolonged period of
distress. Thus, a deep and lasting fall in commodity prices will inevitably
have a direct detrimental effect on the economic performance of all the
commodity exporters, including Russia, and, indirectly, further negative
repercussions due to any weakening in the Russian economy.
* * *
"The transition economies obviously are not shielded
against the negative consequences of the present synchronous global
downturn," concludes Paolo Garonna. "Within their degrees of policy
freedom, governments in these countries need an active policy stance to
respond to the current threats. In fact, the most productive long-term policy
response would be to widen and deepen the process of market-oriented
structural and institutional reforms, which would make these economies more
resilient to external shocks. This would also be instrumental for their
further integration in the European and global economy."
TABLE 1.2.1
Basic economic indicators for the ECE transition economies,
1999-2002
(Rates of change and shares, per cent)
| |
GDP (growth rates) |
Industrial output |
Inflation (per cent |
Unemployment rate |
| |
|
|
2001 |
|
(growth rates) |
change, Dec./Dec.) |
(end of period, per cent) |
| |
1999 |
2000 |
Apr. official forecast |
Jan.-Jun. actual a |
Oct. official forecast |
2002 official forecast |
1999 |
2000 |
Jan.-Jun. 2001 a |
1999 |
2000 |
2001 b |
Jun. 1999 |
Jun. 2000 |
Jun. 2001 |
Eastern Europe |
1.5 |
3.7 |
4.2 |
3.1 |
3.1 |
3½ |
-0.4 |
8.3 |
4.8 |
.. |
.. |
.. |
13.6 |
14.7 |
14.9* |
Albania c |
7.3 |
7.8 |
5-7 |
.. |
7 |
7 |
16.0 |
12 |
-20* |
-1.0 |
4.2 |
4.0 |
18.0 |
17.6 |
15.1 |
Bosnia and Herzegovina d |
.. |
9.1 |
7-9 |
.. |
7-9 |
.. |
10.6 |
8.8 |
14.6 |
-0.4 |
3.4 |
3.3 |
39.1 |
39.1 |
39.3 |
Bulgaria |
2.4 |
5.8 |
5 |
4.8 |
4.5 |
4 |
-9.3 |
5.8 |
1.7 |
6.9 |
11.2 |
9.3 |
12.8 |
18.2 |
17.1 |
Croatia |
-0.4 |
3.7 |
3-4 |
4.5 |
4 |
3-4.2 |
-1.4 |
1.7 |
5.9 |
4.6 |
7.5 |
5.0 |
18.9 |
20.5 |
21.5 |
Czech Republic |
-0.4 |
2.9 |
3 |
4.0 |
3.6-3.8 |
3.8 |
-3.1 |
5.4 |
8.6 |
2.5 |
4.1 |
5.5 |
8.4 |
8.7 |
8.1 |
Hungary |
4.2 |
5.2 |
4.5-5 |
4.2 |
4.3 |
3.7-4.2 |
10.4 |
18.3 |
7.4 |
11.3 |
10.1 |
10.6 |
9.4 |
8.9 |
8.4 |
Poland |
4.1 |
4.0 |
4.5 |
1.6 |
1.5 |
2.0-2.5 |
3.6 |
6.8 |
1.6 |
9.9 |
8.6 |
6.1 |
11.6 |
13.6 |
15.9 |
Romania |
-2.3 |
1.6 |
4.1 |
4.9 |
4.5 |
5.1 |
-7.9 |
8.2 |
10.4 |
54.9 |
40.7 |
35.8 |
11.4 |
10.8 |
8.8 |
Slovakia |
1.9 |
2.2 |
3.2 |
2.9 |
2.8-3.0 |
3.6 |
-3.1 |
9.0 |
6.2 |
14.2 |
8.3 |
7.9 |
17.7 |
19.1 |
17.8 |
Slovenia |
5.2 |
4.6 |
4.5 |
2.9 |
3.7 |
3.6 |
-0.5 |
6.2 |
3.2 |
8.1 |
9.0 |
9.6 |
13.4 |
11.8 |
11.1 |
The former Yugoslav
Republic of Macedonia |
4.3 |
4.3 |
6 |
-5.0 |
-5 |
4 |
-2.6 |
3.5 |
-8.8 |
2.3 |
10.8 |
6.3 |
42.3 |
43.6 |
.. |
Yugoslavia e |
-17.7 |
7.0 |
5 |
.. |
5 |
.. |
-23.1 |
10.9 |
-2.4 |
54.0 |
115.1 |
125.1 |
26.7 |
26.5 |
27.1 |
Baltic states |
-1.7 |
5.4 |
4.7 |
6.3 |
5.7 |
4¾ |
-8.0 |
7.6 |
11.7 |
.. |
.. |
.. |
8.1 |
9.3 |
9.8 |
Estonia |
-0.7 |
6.9 |
6 |
5.4 |
4.8 |
4 |
-3.4 |
12.8 |
5.9 |
3.9 |
4.9 |
6.9 |
6.4 |
6.2 |
7.5 |
Latvia |
1.1 |
6.6 |
5-6 |
8.8 |
8 |
5-5.5 |
-5.4 |
3.2 |
7.9 |
3.3 |
1.9 |
3.1 |
10.0 |
8.4 |
7.8 |
Lithuania |
-3.9 |
3.9 |
3.7 |
5.1 |
4.5-5.1 |
4.7 |
-11.2 |
7.0 |
16.4 |
0.3 |
1.5 |
1.7 |
7.5 |
11.1 |
12.1 |
CIS |
4.5 |
7.8 |
4.2 |
6.1 |
6.1 |
5 |
9.2 |
11.6 |
7.6 |
.. |
.. |
.. |
8.1 |
7.2 |
6.4 |
Armenia |
3.3 |
6.0 |
6.5 |
6.6 |
6.5 |
6 |
5.2 |
6.4 |
2.7 |
2.1 |
0.4 |
4.1 |
10.4 |
11.9 |
10.4 |
Azerbaijan |
7.4 |
11.1 |
8.5 |
8.4 |
8.5 |
8.5 |
3.6 |
6.9 |
5.1 |
-0.5 |
2.1 |
2.1 |
1.2 |
1.1 |
1.3 |
Belarus |
3.4 |
5.8 |
3-4 |
3.7 |
3-4 |
4-5 |
10.3 |
7.8 |
4.1 |
251.3 |
108.0 |
65.3 |
2.1 |
2.0 |
2.2 |
Georgia |
3.0 |
2.0 |
3-4 |
5.5 |
3-4 |
3.5 |
7.4 |
6.1 |
-3.1 |
11.1 |
4.6 |
6.0 |
5.5 |
.. |
.. |
Kazakhstan |
2.7 |
9.8 |
4 |
14.0 |
10 |
7 |
2.7 |
15.5 |
13.6 |
18.1 |
10.0 |
9.1 |
3.5 |
4.2 |
3.3 |
Kyrgyzstan |
3.7 |
5.0 |
5 |
6.7 |
5.6 |
4 |
-4.3 |
6.0 |
6.0 |
39.8 |
9.5 |
8.4 |
3.1 |
3.2 |
3.2 |
Republic of Moldova f |
-3.4 |
1.9 |
5 |
3.1 |
5 |
6 |
-11.6 |
2.3 |
12.1 |
43.8 |
18.5 |
9.1 |
2.3 |
2.0 |
2.0 |
Russian Federation |
5.4 |
8.3 |
4 |
5.1 |
5.5-6.0 |
4.3 |
11.0 |
11.9 |
5.5 |
36.6 |
20.1 |
23.7 |
12.1 |
10.1 |
8.4 |
Tajikistan |
3.7 |
8.3 |
6.7 |
10.3 |
6.7 |
8 |
5.6 |
10.3 |
13.0 |
30.1 |
60.6 |
49.3 |
3.2 |
3.1 |
2.5 |
Turkmenistan g |
16.0 |
17.6 |
16 |
15.0 |
16 |
18 |
15.0 |
28.6 |
8.5 |
.. |
.. |
.. |
.. |
.. |
.. |
Ukraine |
-0.4 |
5.8 |
3-4 |
9.1 |
7.3 |
6 |
4.3 |
12.9 |
18.5 |
19.2 |
25.8 |
11.6 |
4.0 |
4.3 |
3.8 |
Uzbekistan |
4.4 |
4.0 |
4.4 |
4.2 |
4.4 |
4.5 |
6.1 |
6.4 |
7.5 |
26.0 |
28.2 |
28.0 |
0.6 |
0.7 |
.. |
Total above |
3.2 |
6.2 |
4.2 |
5.0 |
5.1 |
4½ |
4.6 |
10.2 |
6.5 |
.. |
.. |
.. |
.. |
.. |
.. |
Memorandum items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CETE-5 |
3.0 |
3.8 |
4.1 |
2.7 |
2.6 |
3 |
2.4 |
8.7 |
4.7 |
.. |
.. |
.. |
11.4 |
12.6 |
13.8 |
SETE-7 |
-2.3 |
3.4 |
4.5 |
4.4* |
4.2 |
4½ |
-9.4 |
7.2 |
5.2 |
.. |
.. |
.. |
16.2 |
17.1 |
16.6* |
Source: National
statistics; CIS Statistical Committee; direct communications from national
statistical offices to UNECE secretariat.
Note: Aggregates
are UNECE secretariat calculations, using PPPs obtained from the 1996 European
Comparison Programme. Output measures are in real terms (constant prices).
Forecasts are those of national conjunctural institutes or government
forecasts associated with the central budget formulation. Industrial output
refers to gross output, not the contribution of industry to GDP. Inflation
refers to changes in the consumer price index. Unemployment generally refers
to registered unemployment at the end of the period (with the exceptions of
the Russian Federation, where it is the Goskomstat estimate according to the
ILO definition, and Estonia where until October 2000 it refers to job
seekers). Aggregates shown are: Eastern Europe (the 12 countries below
that line), with sub-aggregates CETE-5 (central European transition
economies: Czech Republic, Hungary, Poland, Slovakia, Slovenia) and SETE-7 (south-east European transition economies: Albania, Bosnia and Herzegovina,
Bulgaria, Croatia, Romania, The former Yugoslav Republic of Macedonia and
Yugoslavia); Baltic states (Estonia, Latvia, Lithuania); and CIS (12 member countries of the Commonwealth of Independent States).
a January-June 2001
over January-June 2000.
b June 2001 over June
2000.
c Industrial output
covers state sector only.
d Data reported by
the Statistical Office of the Federation; these exclude the area of Republika
Srpska.
e Gross material
product instead of GDP. Data for 1999, 2000 and 2001 exclude Kosovo and
Metohia.
f Excluding
Transdniestria.
g Officially reported
growth rates are of dubious reliability.
* *
*
For further information please contact:
Economic Analysis Division
United Nations Economic Commission for Europe (UNECE)
Palais des Nations
CH - 1211 Geneva 10, Switzerland
Phone: (+41 22) 917 27 78
Fax: (+41 22) 917 03 09
E-mail: [email protected]
Website: http://www.unece.org/ead/ead_h.htm
Ref: ECE/GEN/01/26