Economic Development in Central and Eastern Europe after 20 years of democracy

Transcription

1 Page 1 of 12 Economic Development in Central and Eastern Europe after 2 years of democracy Prof. ALOJZY Z. NOWAK PH.D. UNIVERSITY OF WARSAW FACUY OF MANAGEMENT Page 1 of 12

2 Page 2 of 12 Economic Development in Central and Eastern Europe Some key - historical facts Poland, 4 of June 1989 historical election victory of Solidarity August 1989 first non - communist government in Eastern Block Polish prime minister Tadeusz Mazowiecki The beginning of Revolutions 1989 in Central and Eastern Europe Hungary was next to revert to a non-communist government Fall of Berlin Wall 9 of November 1989 Velvet Revolution in Czechoslovakia, Vaclav Havel- president of Czechoslovakia Upheaval in Bulgaria Romanian Revolution Key facts Collapse of the Soviet Union July 1, 1991, the Warsaw Pact officially dissolved at a meeting in Prague. Agitation for self-determination led to first Lithuania, and then Estonia, Latviadeclaring independence. A coup overthrowing Gorbachev in August 1991 Borys Jelcyn became a president of Russian Federation Ukrainian voters approved independence from the Soviet Union in a referendum Communism fall why? Political facts Suppress of democracy. Lack of sovereignty Soviet domination. Role of Gorbachev, John Paul II, Walesa, Havel decade of great leaders! Communism fall why? Economic facts Bankruptcy of central planned economy (utopia of state economy superiority) Essential lack of market economy instruments as a result: ongoing deficit of shopping goods and services dramatically low of productivity growing distance in innovation, entrepreneurship, competitiveness autarkic model of development Page 2 of 12 1

3 Page 3 of 12 POLISH CASE 1989 GDP per capita Spain Poland Korea Source: Wikipedia Dynamics of GDP in %, Years Poland, - 9,68-7,2 + 2,1 Hungary, - 6,67-11,7-3,6 Czech Rep. - 1,2-11,61 -,1 Russia, - 3, -, -14, Ukraine, - 3,6-8,7-9,9 Belarus, - 1,9-1,4-9,6 Finland, +,1-6,39-3,81 Source: Wikipedia Shock Therapy by Leszek Balcerowicz (9-91) Packet of 1 acts : Act on Financial Economy Within State-owned Companies, Act on Banking Law, Act on Credits, Act on Taxation of Excessive Wage Rise, Act on New Rules of Taxation, Act on Economic Activity of Foreign Investors, Act on Foreign Currencies, Act on Customs Law, Act on Employment, Act on Special Circumstances Under Which a Worker Could be Laid Off. Time of transformation - the role of European Integration Main steps in European integration - criteria for accession to EU stability of institutions guaranteeing democracy, the existence of functioning market economy as well as the capacity to cope with competitive pressure and market forces, the ability to take on the obligations of membership, including adherence to monetary union, implementation of the acquis communautaire, the transposition in the national legislation of the common body of Community legislation developed over years Page 3 of 12 2

4 Page 4 of 12 Ten states access to EU, 1 May of 24 Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. Three years later: Bulgaria, Romania The result of enlargement GDP at current prices in the world in trillions of dollars in the 26 EU 27 14,6 31% EFTA,7 1% U.S. 13,2 28,% Japan 4,9 11,% Triad 33,7 7% Rest of the World 13,2 3% World 46,9 1% Source: International Monetary Fund, 27 EU Next steps to prosperity? Prosperious emerging markets Poland in figures FDI inflow (EUR billions) 21-6, , , , , , , ,97 Source: Polish Information and Foreign Investment Agency 29 Page 4 of 12 3

5 Page of 12 Prosperious emerging markets Poland in figures Exports (EUR in billions) 21-46, , , , , , , ,66 Source: Polish Information and Foreign Investment Agency 29 GDP case of Poland ,1% 21-1,% ,8% 22-1,4% 1994-,2% 23-3,8% 199-7,% 2,3% ,% 26-3,% ,8% 27-6,2% ,8% 28,% ,1% 29-1, - 2,% (est.) 2-4,% Source: Polish Statistical Office, 21 The New EU Members States responses to the global economic crisis: why so different? Source prof. D. Rosati, Wrocław, NMS: GDP changes, 7Q1-9Q2, yoy, % How the crisis affected the NMS? The transmission channels The export channel (trade integration): the fall of western demand for exports translates into falling NMS exports and falling GDP; The capital flows channel (financial integration): the liquidity shortage in western banks and the flight to safety result in capital outlows from NMS, causing balance of payments problems and domestic credit crunch; In addition: The expectation channel: the overall uncertainty and loss of confidence translate into reduced domestic expenditures in NMS; Q1 7Q2 7Q3 7Q4 8Q1 8Q2 8Q3 8Q4 9Q1 9Q2 SI EA Page of 12 4

6 Page 6 of 12 Three sub-groups,, : GDP falls by 16-2% yoy;,,,, SI, : GDP falls by - 9% yoy; : GDP increases by 1%; Explaining the differences: Main hypotheses Varying export dependence (export share in GDP)? Varying credit dependence (credit to GDP ratio, or the depth of the financial sector)? Other explanations? NMS have become more open to trade and more integrated with the global financial markets after EU accession Trade integration: increased dependence on cross-border trade; Financial integration: no restrictions on capital flows and increased dependence on cross-border capital flows, to finance both private expenditures, including on imports, and public deficit; This has been reflected in widening CA deficits financed by abundant capital inflows; these inflows helped to accelerate NMS growth rates in good times ; But being less developed and not part of the euro area NMS (except SI and ) have not enjoyed the same level of stability and confidence of investors as the euro area MS; This has made NMS much more vulnerable to external shocks and sudden flow reversals (even though their fundamentals might have been stronger in some cases, e.g. or vs. GR or PT); Unsustainable current account deficits in some NMS (average of 2-27, % of GDP) -1 SI -2,36-2,89-2,81-14,91-1,78-7,18-1,86-7, ,6-19,16 Page 6 of 12

7 Page 7 of 12 The export channel: changes in NMS exports, 7Q1-9Q2, % For trade, flexible fex rate regimes seem to have worked better than fixed rate regimes (cumulative change in exports, 8Q3-9Q2, %) 3 2 SI 1-1 1Q7 2Q7 3Q7 4Q7 1Q8 2Q8 3Q8 4Q8 1Q9 2Q ,1-14,1-17,1-16,8-13,2-12,3-9, SI EA -3-24,7-26,6-21,6 The fall of exports goes in parallel with the fall of GDP But the implied and the actual GDP effects differ (the fall of (gross) exports in 8Q4-9Q2 multiplied by the share of exports in GDP and the actual fall of GDP in 8Q3-9Q2 % Cumul. fall of GDP, 8Q3-9Q2, % R 2 =,132 SI -1-2 Cumulative fall of exports, 8Q3-9Q2, % SI Implied GDP fall, % Actual GDP fall, % Page 7 of 12 6

8 Page 8 of 12 because export intensity of GDP is not correlated with GDP falls The export channel: a summary Cumul. fall of GDP 8Q3-9Q2, %,2,4,6,8 1-1 SI R 2 =,76-2 Exports/GDP ratio Deeper falls of exports associated with deeper recession; But GDP effects different, because export dependence not correlated with GDP falls; Countries with flexible fex rates suffered smaller exports (and GDP) losses than countries with fixed fex rates; Rapid credit expansion before the crisis (average annual growth rate, 24-7, %) Rapid expansion of bank credit fuelled faster GDP growth in SI GDP, avg growth rate, 24-7, % SI R 2 =, Loans, avgerage growth rate, 24-7, % Page 8 of 12 7

9 Page 9 of 12 but also contributed to steeper GDP declines during the crisis. The credit channel: changes in external assets and liabilities in NMS banks (between 3Q28 and 1Q29, in %) Cumul. GDP fall, 8Q3-9Q2, % SL R 2 =,34-2 Loans, average, growth rate, 24-7, % SI EA External assets External liabilities The credit channel: change in bank credit, denominated in EUR, 8Q3-9Q2, % The credit channel: increased interest rate spreads over euro area (3M money market interest rates, Jul/8-Jul/9, %) , 1,93 EA -2,38-1, -2,1-8,3-7,48-7,99-14, Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul EA Page 9 of 12 8

10 Page 1 of 12 Generally, higher dependence on credit associated with stronger recession Faster credit expansion led to larger CA deficits GDP fall, 8Q3-9Q2, % SI R 2 =, Bank credit to GDP ratio, % Avg CA balance, 2-7, %GDP SI R 2 =, Average growth rate of credits, 24-7, % and large CA imbalances in good times contributed to steeper GDP declines while deterioration of CA balance was also associated with deeper GDP falls during the crisis. GDP fall 8Q3-9Q2, % R 2 =,627 SI -2 Average CA balance, 2-7, % of GDP GDP fall 8Q3-9Q2, % R 2 =, Change in CA balance in 2-7, % of GDP Page 1 of 12 9

11 Page 11 of 12 The credit channel: a summary Rapid credit expansion accelerated GDP growth in 24-7 and contributed to deeper GDP falls during the crisis; generally, the faster was the credit growth in good times, the deeper is the GDP fall during crisis; This was reflected in widening CA deficits, financed by capital inflows in good times ; Capital outflows from NMS led to credit crunch and increased interest rates spreads over the euro area; Higher dependence on bank credit associated with deeper GDP declines; The role of twin deficit Both large CA deficits and their deterioration strongly contributed to GDP falls; Large budget deficits seem not so much to be associated with GDP falls; But deterioration of fiscal balance in the pre-crisis period contributed to steeper GDP declines The crisis in NMS: imported, homemade,or both? All NMS have been hit by the crisis, though to a varying extent; But NMS is not a homogeneous group economic structures, fundamentals and policies differ across the group; In many NMS the crisis was essentially home-made and only amplified by external shocks (credit bubbles in,,, and ); Some other NMS had weak fundamentals and were vulnerable to any deterioration of external environment (, ); Still some other NMS suffer from the crisis for which they are not responsible (, SI); Poland is in exceptional situation! Conclusions Rapid pre-crisis growth, driven by excessive credit expansion supported by foreign capital inflows, led to widening imbalances and increased vulnerabilities to external shocks; NMS that have built up unsustainable twin deficits (CA and fiscal) in the pre-crisis expansion, suffered most when foreign capital inflows dried up and confidence fell (,,,, ); NMS that have grown at a more moderate pace and have not relied excessively on credit growth and external financing, have been generally less affected (,,,, SI); If you speed up, you travel fast but you can easily crush when road conditions change suddenly. Page 11 of 12 1

12 Page 12 of 12 Case of Poland is rather optimistic Towers in Warsaw 29 Page 12 of 12 11