E/1999/15
Distr.:General
19 April 1999
Original: English
Substantive session of 1999
Geneva, 5–30 July 1999
Item 10 of the provisional agenda
Regional cooperation
Summary
of the economic survey of Europe, 1998
Contents
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Paragraphs |
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Page |
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Overview of recent economic developments and selected policy issues in
the Economic Commission for Europe region........................................................................................................... |
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2 |
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A. Current
economic situation in the region.................................................................... |
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1–10 |
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2 |
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1. Introduction............................................................................................... |
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1–2 |
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2 |
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2. Western market economies........................................................................ |
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3–4 |
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2 |
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3. Transition economies.................................................................................. |
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5–10 |
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3 |
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B. Strong
policies and weak foundations........................................................................ |
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11–37 |
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5 |
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1. Unemployment........................................................................................... |
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14 |
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6 |
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2. Inflation..................................................................................................... |
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15–16 |
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6 |
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3. Trade liberalization..................................................................................... |
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17–19 |
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7 |
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4. Liberalization of international capital
flows................................................... |
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20–31 |
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8 |
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5. Conclusions............................................................................................... |
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32–37 |
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11 |
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Tables |
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1. Real
GDP in the developed market economies, 1996–1999.................................................... |
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15 |
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2. Basic
economic indicators for the ECE transition economies, 1996–1999................................ |
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16 |
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3. International
trade and external balances of the ECE transition economies, 1996–1998............ |
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18 |
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Overview
of recent economic developments and selected policy issues in the Economic
Commission for Europe region1
A. Current
economic situation in the region
1. Introduction
1. The crisis that hit the
world economy in 1997 with the devaluation of the Thai baht persisted through
1998, with powerful boosts from the Russian devaluation and debt moratorium in
August 1998 and the Brazilian crisis in the second half of 1998. Although the
particular circumstances of each incident are different, they have been linked
by financial contagion and its subsequent effects on real activity and
international trade. In early 1999, the crisis is by no means over: despite a
large emergency support package from the International Monetary Fund (IMF),
Brazil was forced to let its currency float, and by the end of February, it had
depreciated by about 40 per cent against the dollar, which in turn is likely to
have ripple effects on other countries in the region. The collapse in commodity
prices, especially of crude oil, is creating serious stability problems for oil
producers, not least in the Middle East, and there is still much uncertainty
over the economic outlook in China and the possible implications this might
have for policy in that country, especially with regard to the exchange rate.
2. Although its weight in the
world economy is relatively small, the Russian currency and debt crisis in
August 1998 had a much greater destabilizing effect on the international
financial markets than the Asian crisis of 1997, and its repercussions for
other countries in the Economic Commission for Europe (ECE) region, especially
the transition economies, were generally more serious. Some of the financial
effects — such as the drop in stock market prices, including in some of the
central European economies — were due to portfolio adjustments as investors
liquidated positions in healthier markets to offset their losses in the Russian
Federation. But the key element was a fundamental reassessment by investors of
the risks and attractiveness of investing in emerging market economies. Much of
the foreign investment in the Russian Federation had entered when an
IMF-supported programme was being followed, and no doubt investors assumed that
if anything went wrong any losses would be avoided with the help of a bail-out
organized by IMF, as was the case in South-East Asia. That assumption was
proved false in the Russian case, and consequently there were considerable
fears in September–October of a global recession being triggered by the falls
in stock prices and the threat of a “credit crunch” as credit conditions were
tightened significantly, not only for borrowers in emerging markets but also in
developed market economies, such as the United States, where the spreads over
United States Treasury Bills for corporate borrowing rose significantly. There
were also large fluctuations in the value of the dollar against the European
currencies, especially when there were exaggerated fears for a short while for
the stability of the German banking sector because of its exposure to Russian
borrowers. These tensions were eased by the series of cuts in United States
interest rates between the end of September and mid-November, and by the
coordinated cut in interest rates in early December by the 11 future members of
the European Monetary Union (EMU). Stock prices have recovered from their
levels of autumn 1997, especially in the United States, and a measure of calm has
returned to the financial markets. But this may well be deceptive. The
financial turbulence of the last 18 months or so has plunged large areas of the
developing world into recession, and the deflationary consequences for trade in
goods and services and investment income has led to a steady lowering of growth
forecasts for 1999 both in Western Europe, where the steady deterioration in
net export growth has not been offset by stronger domestic demand, and in many
of the transition economies, where the slowdown in the growth of import demand
in Western Europe, together with the increased costs of international borrowing
(for those who still have access to it), imply a tighter balance of payments
constraint on their growth rates in 1999.
2. Western
market economies
3. Throughout 1998, the
adjustments to the crisis continued to be supported by strong growth in the
United States, where GDP grew by just under 4 per cent for the second year
running. This was underpinned by the continued willingness of United States
consumers to spend virtually all their disposable income and by the buoyancy of
business investment, especially in information technology. But it is becoming
increasingly uncertain how long this benign process can continue. Although
inflation has not picked up, one consequence of the consumer boom is a record
trade deficit, which is increasing rapidly and depends on the willingness of
foreign investors to continue financing it. In the short run, this may not be a
problem since the increased aversion to risk means that for investors there are
few other safe havens capable of providing liquid assets on a large enough
scale, but this cannot last indefinitely if the deficit continues to widen.
Similarly, private expenditure has been supported by the fall in oil prices,
equivalent to a large tax cut2 which is
unlikely to be repeated in 1999, and by very high levels of borrowing against
stock market gains. The growth in the latter cannot continue indefinitely, and
when the correction eventually comes there is likely to be a swift return to
positive savings rates. The question is not whether this will occur but when
and whether the adjustment will be mild or impose a sharp shock on the economy.
In fact, the projected further widening of the United States current account
deficit to quite a high level in 1999 requires, in principle, a change in
domestic policies to bring about an increase in net exports. This will have to
rely on both a reduction in domestic absorption and a depreciation of the
dollar. Given the tight labour market, a weakening of the dollar alone would
lead to mounting inflationary pressures. The ensuing tightening of monetary
policy would then risk pushing the economy into recession (the “hard landing” scenario).
The extent of domestic policy and exchange rate changes, however, will depend
on the strength of domestic demand in Asia and Western Europe. Given the
well-known problems in Japan and the Asian emerging economies, this explains
why the United States authorities are keen to see a faster rate of growth in
Western Europe.
4. Like the United States,
Western Europe initially benefited from the hardship suffered by the rest of
the world: the large fall in the prices of commodities and to a lesser extent
of a range of Asian manufactured goods led to a substantial improvement in
their terms of trade, which in turn kept down the already small rates of
increase in consumer prices and boosted real disposable income. In addition,
the “flight to quality” in the financial markets made it easier to reduce
interest rates in a number of countries. However, in sharp contrast to the
United States, growth in Western Europe was well under 3 per cent in 1998 (see
table 1) and was slowing down throughout the year, particularly in the
third and fourth quarters. The failure of domestic demand to offset the
weakening of net exports largely reflects the tighter stance of macroeconomic
policies over the last few years. Fiscal policy was for the most part broadly
neutral in 1998, but this follows two years of severe fiscal retrenchment in
the run-up to the introduction of the euro, and the present stance of policy
makes no allowance for the weakening cyclical position in the region. Moreover,
the rules of the Stability and Growth Pact for EMU members leave virtually no
room for fiscal manoeuvre should the cyclical slowdown become more severe. In
order to prepare for a fiscal response to a future downturn in the next
millennium, the authorities appear to be prepared to tighten fiscal policy to
reduce structural budget deficits during a possible slowdown now. Monetary
policy also appears to be too tight in the euro area: although nominal interest
rates are at historically low levels, real rates are still relatively high. A
cut in interest rates and a postponement of the target dates for reducing
structural budget deficits would improve the prospects for economic growth in
Western Europe. If this is achieved, progress in reducing the budget deficits
would be greatly eased, as the United States experience has shown, and it would
also strengthen investment and lower unemployment. The unemployment rate
averaged 10.9 per cent in the euro area in 1998, and was starting to rise again
towards the end of the year. The situation is especially worrying in Germany,
where economic growth slowed sharply in the second half of 1998 and where the
unemployment rate was 9.1 per cent in January 1999. Given the importance of the
German economy both for Western Europe as a whole and many central European economies,
the concerns of the German authorities about the current stance of economic
policies should be seen as a European not simply a national issue. Expectations
for growth in Western Europe in 1999 were still being lowered in the closing
months of 1998, and the average forecast has now slipped below 2 per cent. On
past experience, this implies no further reductions in unemployment and in all
likelihood it will start to rise again.
3. Transition
economies
5. The global economic crisis
and the associated financial instability have begun to have a severe impact on
the transition economies. At first, the principal direct effect of the Asian
crisis was on the primary commodity producers of the Commonwealth of Independent
States (CIS), notably the Russian Federation, where falling oil prices have had
a significant impact on export earnings and contributed to the crisis in August
1998. For most of Eastern Europe, the direct impact was small because its
predominant trade links are with Western Europe. But the subsequent collapse of
Russian imports was nevertheless significant for a number of East European
exporters in 1998, especially the Baltic States, which still have relatively
large trade shares with the Russian Federation. With the weakening of West
European import demand in the course of the year, there has been a rapid
deterioration in the economic performance of the transition economies since the
Russian crisis of summer 1998, a process which appears to have accelerated in
the closing months of 1998 and in early 1999. The financial contagion from the
Asian and Russian crises was relatively limited, even for the few countries
which are relatively more integrated with the international financial markets,
but the real threat, as was pointed out in the 1998 Survey, lay in the
real economy and the possibility of a sharper than expected slowdown in Western
Europe. Unfortunately, this is what has occurred, and the highly
export-dependent economies of central and eastern Europe are being subject to a
severe external demand shock.
6. The slowdown in economic
growth in 1998 occurred in virtually all the East European and Baltic
economies, and was generally more severe than was expected earlier in the year.
(Hungary is the principal exception, so far, to the general recessionary
trend.) Instead of improving on the relatively weak performance in 1997, gross
domestic product (GDP) in Eastern Europe rose on average by just 2 per cent,
less than half the rate implied by the official forecasts and nearly a
percentage point lower than in 1997 (see table 2). The Baltic economies did
rather better for the year as a whole (just over 4 per cent), but the
deceleration from the 1997 rate was considerable.
7. For the leading reform
economies and the Baltic States, the relatively strong growth of the last few
years was broken in mid-1998, largely by the deterioration in external
conditions, but weak domestic factors also played a role, especially in
South-East Europe. Some slowdown had been expected in some of the faster
growing countries because of measures taken to check a too rapid growth of
consumer spending and rising current account deficits, but the deceleration was
much more than anticipated. The full extent of the slowdown is still not fully
reflected in the statistics, partly because many of the data are not yet
available and partly because of lags, for example, between the inflow of export
orders and actual deliveries. But the industrial production figures point to a
rapid deceleration through the year, from a year-on-year average growth in
Eastern Europe of just over 6 per cent in the first quarter to 1.4 per cent for
the year as a whole. These aggregate figures conceal a wide variation in
national economic performance, but broadly speaking, in most of the
faster-reforming and faster-growing economies of Central Europe and the Baltic
States, the growth rates of industrial production have fallen considerably,
while in South-eastern Europe the recession in industry worsened in the second
half of the year.
8. The deterioration in
economic performance is also reflected in the labour markets, where the modest
improvements in the levels of employment slowed down or were reversed in most
of the transition economies during 1998 and unemployment rates rose sharply
from mid-year. In December 1998, the unemployment rate averaged 12.6 per cent
in Eastern Europe, up from 11.6 per cent in June; in the Baltic States it ended
the year at 7.3 per cent, a full percentage point higher than 12 months earlier.
Unemployment has also continued to rise sharply in January and February 1999,
although this partly reflects the seasonal effects of a hard winter. In the
CIS, the picture is also one of sharply deteriorating economic performance.
Particularly hard hit by both the Asian and Russian crises, output has fallen
(or at best growth has been severely weakened) and the slender gains of 1997
have been more than offset.
9. One of the crucial
elements in the situation now facing the transition economies is the deterioration
in their current accounts, all of which are in deficit (see table 3). These
deficits averaged about 4.5 per cent of GDP in Eastern Europe in 1998, but the
range was considerable, from 1.5 per cent in the Czech Republic, which is now
in a deepening recession, to some 7 per cent in Croatia and Romania and about
11 per cent in Slovakia; in the Baltic States, the proportions range from
nearly 10 to 13 per cent. The majority of these deficits were deteriorating
throughout the year, and towards the end of 1998 most of them were much larger
than even the more pessimistic forecasts made at the start of the year. For
most of the East European and Baltic economies, imports were still rising
faster than exports in 1998, and given the deterioration in their export
prospects the question arises as to how long the present deficits can be
sustained. The more rapidly growing economies of the last few years — Croatia,
Hungary, Poland and Slovakia, for example — have all had large increases in
their current account deficits, underlining the dependence of the
transformation process on imports and foreign borrowing. But this
import-dependent growth could be increasingly constrained in 1999 by at least
three factors: the risk of a tightening of policy in some of the transition
economies, shortfalls in capital inflows and the increased cost of foreign
borrowing, and the slowdown in West European growth. The official forecasts for
the transition economies (see table 2) still point to an average rate of growth
of just under 3 per cent in Eastern Europe in 1999 and some 4.5 per cent in the
Baltic States. But these are now looking very optimistic and it is increasingly
likely that the actual outcomes will be much lower.3
In the CIS countries, a fall in the average level of output appears
unavoidable, but how large it will be is greatly dependent on what happens in
the Russian Federation. Given the sharp slowdown that now appears to be under
way, this is not the moment to tighten fiscal policy in the transition
economies, although the discussions in some of them suggest that this may be
the intention. Such action, combined with an external demand shock, would
intensify the downturn and ultimately be self-defeating by creating larger
rather than smaller budget deficits. If anything, there is room for a loosening
of monetary policy since in a number of countries real interest rates rose
sharply in 1998 and were one of the domestic factors that contributed to the
slowdown.
10. A faster rate of growth
(and of import demand) in Western Europe is highly desirable as the best way of
supporting growth in the transition economies and also heading off the
increasing pressures for protection from Eastern imports, pressures which have
already led to anti-dumping actions being started for a number of products.
Western Europe is running a large current account surplus not only with the
world but also with the transition economies. In the first nine months of 1998,
the European Union (EU) alone had a trade surplus of about $16.5 billion in its
trade with Eastern Europe and the Baltic States. If a faster growth rate in the
EU cannot be achieved, ways should be found of recycling part of the EU current
account surplus to the transition economies, especially to those which face
increasing difficulties in raising funds on the international capital markets.
This could involve official transfers or loans, but however it is implemented,
the key point is to recognize that the West European current account surplus is
having a deflationary impact on the countries of Eastern Europe and the Baltic
States. If the EU, as the major economic power in the region, acts with a
broader sense of responsibility towards all the countries in the area, such
measures would not only help to sustain growth and structural change in the
transition economies but would also provide positive feedback to the EU itself:
in 1998 Eastern Europe and the Baltic States imported about $100 billion worth
of goods from the EU — that would seem to be large enough to be worth
preserving and expanding.
B. Strong
policies and weak foundations
11. Apart from their
deleterious effects on the world’s economies, the Asian and Russian crises have
led to increased questioning of the economic policies which have been pursued
for the last two decades or so, principally under the aegis of the Group of
Seven leading market economies and the Bretton Woods institutions. What became
known as the “Washington consensus” was a set of policies that were developed
in response to the inflation crises in the developed market economies in the
1970s and 1980s and to the Latin American debt crisis in the 1980s. The
consensus comprised two major elements, one concentrating on macroeconomic
stability and the other on so-called supply-side reforms which would underpin
both macro-stability and create the basis for spontaneous and sustained
economic growth. Macroeconomic stability, reflecting the experience noted
above, focused essentially on lower inflation and then pre-empting any further
outbreak with strict and attentive monetary policies. At the same time, not
only were general government budget deficits to be lowered in order to support
the objectives of monetary policy but the level of government spending was also
to be reduced as much as possible, the assumption being that the smaller the
role of the State, whether in the actual production of goods and services or in
its attempts to intervene in the workings of the economy, the better would be
the economic performance of the private sector and of the economy as a whole.
The programme of supply-side policies followed from the latter point: product
and factor markets should be deregulated as far as possible, State-owned assets
and supply of services should be privatized and international trade and capital
markets liberalized. More recently, a proposal to change the IMF articles of
agreement to include capital account convertibility as an ultimate objective
for all members was made by the Fund’s Interim Committee in September 1997 —
this would enable the Fund to insist on a country liberalizing its capital
account as one of the conditions for receiving IMF assistance.
12. This “mainstream” policy
framework was firmly in place when the communist regimes of Eastern Europe and
the former USSR collapsed between 1989 and 1991. Confronted with economies
dominated by State-owned enterprises and widespread government intervention and
characterized by high levels of economic inefficiency and extensive
restrictions on private initiative, the advice from most Western Governments
and the international financial institutions was derived directly from the
Washington consensus: the transition to a market economy could best be made by
liberalizing and privatizing the economy as quickly as possible, while
macroeconomic policy should establish and maintain low rates of inflation and
balance in the general government and current accounts. Previous issues of the Survey4 judged that this approach greatly
underestimated the task of creating a market economy: it focused on too narrow
a set of exclusively economic variables and ignored the risk that
liberalization without the appropriate institutional infrastructure was
unlikely to establish a functioning and “efficient” market economy. Macroeconomic
stabilization was unlikely to lead to sustainable development unless
accompanied by a carefully sequenced programme of structural reforms. Moreover,
in many transition economies, and the Russian Federation was a prominent but
not unique example, it was difficult to see how the standard macroeconomic
policy package could easily be applied when the banking and financial sector
was so underdeveloped that the links between the real and financial sectors of
the economy were too weak to support the use of traditional monetary
instruments, or when Governments were unable to control their expenditure and
revenue because there was no functioning fiscal system.
13. In several respects, many
of the policies recommended by the mainstream consensus have come dangerously
close to being dogmas based on oversimplified models and incomplete evidence.
The certainty with which they are proposed and pursued is not reflected in the
available empirical evidence. This tendency to simplification is not confined
to the policy recommendations for transition and developing economies.
1. Unemployment
14. Unemployment in the
European Union is by all accounts its major political and social problem and
its major economic failure. The standard analysis from most of the
international economic institutions and from Western Europe’s central banks is
that the problem is essentially structural and must be tackled by measures to
make labour markets more flexible rather than by policies to boost demand and
output. However, comparisons with the United States, the usual exemplar in
matters of labour market flexibility and lowering unemployment, do not suggest
an unequivocal difference between Europe and America. Real wages in Europe
appear to have been flexible in the 1980s and do not appear to have been more
rigid than in the United States;5 and,
more recently, one leading labour economist has concluded that the assertion
that European unemployment is high because European labour markets are “rigid”
is too vague and probably misleading. Many labour market institutions that
conventionally come under the heading of rigidities have no observable impact
on employment.6 There is little evidence
that reducing employment protection is a solution to high unemployment,
although active labour market policies may help people to find work. Virtually
every fall in unemployment in Western Europe in the last two decades or so has
been accompanied by an easing of macroeconomic policy (either fiscal expansion,
or lower interest rates or devaluation etc.). Thus, without demand increased
flexibility can have no effect. Restrictive macroeconomic policies over a long
period,7 linked more recently to the objectives
of the Maastricht Treaty, have kept growth well below the 3 per cent annual
average forecast when the Single Market was completed, and in turn have led to
an adjustment in productive capacities consistent with a lower expected rate of
growth and an unemployment rate of about 10 per cent.8
Lowering unemployment will therefore need stronger demand, but to be sustained
there will also need to be more investment. Profit shares are now higher than
they were in the 1970s and the 1980s, but real long-term interest rates, which
were very high for a long time, have fallen only slightly below those in the
United States (which is at a very different stage in the cycle) and need to
fall further if investment is to rise and capacities to expand sufficiently to
absorb the unemployed. In sum, a significant cut in unemployment in the EMU area
requires a period of above-average rates of investment and of output growth.9 This goes against the grain of the
ruling policy prescription, but as one leading macroeconomist has observed, it
is necessary to underline that the international policy makers’ “story” about
the rise in unemployment and way to cure it might be badly flawed. The
confidence with which the prescription is administered does not yet correspond
to a convincing mass of evidence.10
2. Inflation
15. The reduction and control
of inflation occupies a prominent position in the Washington consensus, and has
clearly been given high priority in Western Europe and the transition
economies. This was a reaction to a general acceleration of wage pressures in
Europe in the late 1960s and the cost-push effects of the two major oil shocks
of the 1970s. The key argument for focusing on inflation as a principal
objective of macroeconomic policy is that it distorts the information content
of the price mechanism, and by disrupting the basic coordination system of the
market economy reduces the propensity to invest and hence economic growth.
Also, high rates of inflation are often accompanied by high rates in its
variability and this also has a negative effect on expectations. The
justification for continuing to give priority to inflation control, even when
it has virtually disappeared in Western Europe, is that without an attentive
monetary policy it can quickly accelerate and veer out of control again. But
both the costs of inflation and the dangers of acceleration once any slippage
is allowed may be exaggerated. The evidence suggests that inflation is costly
in terms of lost output only when annual rates exceed 40 per cent — then there
is a danger that high inflation will lead to low growth rates.11 Below this rate, growth and investment
can recover even though inflation is still in double digits: the important
element is that there are expectations that it will remain on a downward trend.
In most of the transition economies, annual inflation rates are now below 20
per cent, with many in single digits, but paradoxically there appears to be a
positive relationship between output growth and the average inflation rate
between 1993 and 1998.12 However, this
reflects differences not so much in the rate of inflation but in its rate of
deceleration over the period: where a more gradual approach has been adopted,
conspicuously among the leading reformers, output growth has been rapid and
investment encouraged. In contrast, the excessive emphasis on rapid price
stabilization in the Russian Federation, for example, involving increasingly
tight monetary policy, has had highly negative effects on the real economy and
has contributed to the growth of payments arrears and other perverse outcomes.13 Moreover, the persistence of moderate
rates of inflation in much of Central Europe reflects a continuing adjustment
of relative prices as administrative controls are gradually lifted, adjustments
which actually represent improvements in the market system. It would not be
sensible to react to such price increases with tighter monetary policy. Nor is
it necessarily desirable to accelerate the process of freeing controlled prices
(it is well known and accepted that public and semi-public housing rents are
heavily subsidized in the transition economies and that a move to more economic
levels is necessary for an improvement in the housing stock, but this cannot be
done abruptly as the subsidies are an important part of the social safety net
in these countries).
16. In Western Europe,
inflation rates are practically zero at the present time, yet policy is still
deeply concerned that small monthly increases could set off another
inflationary surge. But the evidence suggests this concern is misplaced: there
appears to be no grounds for believing that inflation is related to previous
rates of increase14 and therefore
little risk of an acceleration getting out of control. Moreover, this
pre-emptive stance of monetary policy, at insignificant rates of inflation, appears
to make no acknowledgement of the fact that inflationary expectations have
changed significantly since the 1970s and 1980s, and that the structural and
technical changes that have occurred in the developed economies since then have
reduced the likelihood of present wage and price setting behaviour being
quickly reversed. However, the belief that monetary policy will be tightened in
response to minor upward deviations from set targets has a depressing effect on
expectations of output growth and the propensity to invest. The view that
close-to-zero inflation is a necessary and even a sufficient condition for
strong, sustained growth and falling unemployment is not based on historical
evidence. But continuing to focus on such an objective is likely to have
deleterious effects on the prospects for reducing the currently high rates of
unemployment in Western Europe.
3. Trade
liberalization
17. The weak links between
strong policy recommendations and the supporting empirical analysis are not
confined to the labour market and domestic prices. The transition economies
were advised in 1989 that price and trade liberalization could not be
introduced gradually despite the experience of Western Europe, which phased out
its wartime price controls in line with supply-side improvements to avoid
boosting inflation, and which together with North America started to liberalize
its foreign trade gradually over a long period starting in the 1940s, a process
that is still not complete.15
The recommendation for rapid trade liberalization was supported by an
influential World Bank study of 17 countries, which concluded that a bold
liberalization tends to be more sustainable than one which is staged. But in a
careful review of this seven-volume study, it was pointed out that the great
diversity of experience of the individual countries did not support the
extravagant claims made for the generality of the study’s conclusions.16 A similar degree of uncertainty
surrounds the relationship between trade liberalization and faster economic
growth, a crucial issue since liberalization is essentially an instrumental
policy, not an end in itself. Some economists17
find a close and positive relationship, emphasizing the benefits of removing
the static and dynamic costs of import substitution; others18 contend that the presumed relationship
depends on the validity of specific microeconomic assumptions, which rarely
appear in reality, and that once increasing returns to scale and
productivity-boosting investment are brought into the picture, the standard
case for liberalizing trade to boost growth breaks down and a plausible case
for interventionist policies can be made. Again, a careful review of the
empirical evidence underlines its inconclusiveness — it is possible that trade
liberalization may in fact favour output growth but not in a straightforward
manner, and that in the short run the adjustment costs may predominate over the
benefits.19
18. The argument for trade
liberalization is that exposure to increased competition will force domestic
enterprises to be more efficient, and the more quickly this is achieved the
better. However, there are two points to emphasize here. First, the scale of
the adjustment shock of liberalizing trade will depend on how far the domestic
output, employment and relative price structures have to change in response to
the new competitive pressures. For many transition economies, the scale of
restructuring required by the shift from central planning to competitive
markets is so large that the domestic economic, political and social
institutions, which are also in a state of transition, are unable to cope with
the adjustment costs, which in turn may generate large-scale resistance to
reform (the study of Romania in the current Survey provides a telling
example of this).
19. Second, economic growth and
development is a highly complex process, the causes of which are still poorly
understood; but economic historians, and economists outside the neoclassical
persuasion have always emphasized the crucial role of institutions in
stimulating and facilitating the process of change and of mobilizing and
expanding the resources available for development. In the presence of a heavily
distorted output structure, weak corporate governance and the absence of
appropriate institutions — the situation in many transition economies — rapid
trade liberalization may be more likely to lead to unemployment and stagnation
rather than economic growth and positive structural adjustment. But generalizations
are difficult. Poland, Hungary and to a lesser extent the Czech Republic appear
to have gained from opening their economies to international trade, but there
is little sign of similar responses in Romania or the Russian Federation or
many of the other countries that are lagging behind in the process of reform.
It is sometimes argued that the transition economies where GDP growth has been
most rapid are those where liberalized trade and current accounts emerged
quickly, where structural reform was rapid and where inflation was falling, so
that the countries that are succeeding the best are the countries that followed
the IMF policy closest, and the countries that are lagging behind — Romania is
an example — are the countries that were least able to stick to the
strategy.20 But such cross-country
comparisons do little to establish the direction of causation. An alternative
view is that the most successful reformers appear to be those where the initial
conditions — in terms of both the required scale of restructuring and the
institutional capacity to handle it — were more favourable to a faster rate of
transition. In other words, Governments were able to implement — and their
electorates were willing to tolerate — a faster rate of change than in other
transition economies. But this means that the pace of reform is largely
determined by the historical legacy and not only by the choice or the political
will of Governments.
4. Liberalization
of international capital flows
20. The liberalization of the
international capital markets is perhaps one of the most controversial elements
in the ruling orthodoxy, especially since the Asian crisis broke in August
1997. The official case for free capital movements is that it is merely an
extension of the argument for free trade in goods — countries with insufficient
domestic savings to finance their own investment can draw on the surplus
savings of others,21 and by
searching out the most profitable projects foreign capital will lead to a more
optimal allocation of world resources and a convergence of per capita incomes.
However, although the estimated benefits from free trade may also be
controversial, there is no doubt that serious efforts have been made to quantify
them, and there is a body of evidence which points to significant gains even if
these range considerably in size. In the case of capital account
convertibility, attempts to quantify the benefits, as Professor Bhagwati has
pointed out,22 are virtually non-existent
and are more a matter of repeated assertion than careful analysis. In fact, the
available evidence casts doubt on many of the presumed major benefits of free
capital movements. Contrary to expectation, domestic investment and domestic
savings rates tend to be closely correlated across countries: different rates
of return on capital persist and are not equalized by foreign capital flows.23 This is not so surprising if it is
recalled that different rates of return will affect the flows of foreign capital,
other things being equal. But “other things” are not equal in most of the
transition and developing countries: legal and institutional structures are
often inadequate to attract foreign investment, while economies of scale and
conglomeration in the highly integrated economies of Western Europe and North
America still provide the major attraction for investors. Some 80 per cent of
the Organisation for Economic Cooperation and Development foreign direct
investment still flows to other OECD countries,24 and despite the large absolute flows to
the rest of the world in the 1990s, most portfolio investment in the United
States and Western Europe still goes into United States and West European
shares, respectively. Despite popular claims to the contrary, both capital
flows and international trade are still more regionally concentrated than truly
global.25 This helps to explain —
but only helps since there are many complex factors involved — why there is
little evidence in favour of income convergence in the world economy.26
21. Nor do the great benefits
claimed for free international capital markets appear to be reflected in better
economic performance, irrespective of its distribution. Growth rates of GDP in
the last two decades have generally been much lower than in the 1960s, in both
the developed and developing countries, and investment ratios (to GDP) have
generally fallen. Although there are many factors involved in this
deterioration and it should not be denied that some countries have benefited from
increased liberalization, the proponents of unfettered international capital
movements cannot claim that they have been generally associated with higher
growth rates, more efficient resource allocation or a more equitable
distribution of incomes per head.
22. What is clear, however, is
that the liberation of international capital flows, particularly by the
developed market economies, has been accompanied in the 1980s and 1990s by a
considerable increase in financial market volatility — interest rates, exchange
rates and capital flows themselves all exhibit very much larger fluctuations
than in the 1960s and early 1970s. Sudden inflows and equally sudden outflows
of foreign capital create considerable difficulties for the management of
domestic monetary policy;27 the resulting
uncertainty and higher risks implied by financial volatility lead to caution on
the part of Governments (which tend to set interest rates higher than they
might otherwise have been) and of private business (faced with increased costs
of capital and increased uncertainty over future demand). The net result is a
tendency for growth rates to fall below what is feasible,28 a particularly serious consequence for
the transition economies intent on closing the considerable income gap between
themselves and the members of the EU.
23. The other aspect of
financial volatility is its propensity for contagion, the tendency for a
financial crisis in one country or region to spread to others largely
irrespective of the state of the economic fundamentals in the latter. Contrary
to the textbook model of large numbers of investors making careful independent
judgements as to profitable opportunities, the capital markets are subject to
bouts of “herd behaviour” — that is, investors follow one another without
forming their own judgements or expectations about individual economies.
Contagion is reinforced by the adjustment of portfolios whereby losses or
margin calls in one market are balanced by the liquidation of assets in other
markets which may very well show no weakness at all in the real economy —
indeed, in this context, the stronger and more liquid markets may be the more
vulnerable. Herd behaviour turns into a classical financial panic when foreign
investors rush for the exit when their expectations change, for whatever
reason. This can trigger a run on the currency, a collapse in the domestic bond
market and a liquidity squeeze on the domestic banks, as happened in Asia in
1997 and the Russian Federation last summer. Although the origins of the crisis
may be due to faults in the domestic economy where it began — clearly the case
in the Russian Federation29 — the panic tends
to amplify the crisis beyond anything that might be justified by the original
causes.
24. In the immediate aftermath
of the Asian crisis, there was a tendency to put the blame for it not on the
instability of the capital markets but on the countries themselves — internal
weaknesses, such as weak regulatory frameworks, poor systems of corporate
governance, a general lack of transparency in the financial and banking
sectors, “crony” capitalism and so on. The question is not whether such
deficiencies exist but whether they played a significant role in causing and
propagating the crisis. The argument that lack of transparency etc. somehow
deceived foreign investors into placing their funds in these countries is
difficult to accept since these weaknesses have long been known to be part and
parcel of the definition of economies as “developing” or “in transition”. Weak
financial and banking sectors may make the crisis worse, but capital flow
reversals appear to be the main culprit in amplifying the initial crisis and
transmitting it to other countries.30
What countries are affected and how badly will depend on the extent of their
integration into the international trade and financial structures. On the
whole, the transition economies of Central and Eastern Europe were less
severely hit by financial contagion from the Asian and Russian crises than by
the increased cost of borrowing on the international markets and the subsequent
real economy effects on their exports, as reflection of the fact that their
integration in world trade has proceeded much further than in the financial
markets.31
25. The policy question that
arises from the above is whether it is possible to reduce the instability of
the international capital markets, and if not whether countries can protect
themselves against surges in capital inflows and their sudden reversal.
Proposals to improve regulatory systems, improve transparency and generally
improve the flow of accurate information in — and between — national economies
are desirable in themselves as means to more effective market systems, but as
suggested already, it is unlikely that deficiencies in these areas in the transition
and developing countries played a major role of causing the crisis. The more
serious weaknesses of governance and regulation would instead appear to be
located in the developed market economies of North America and Western Europe.
The collapse of the Long Term Capital Management (LTCM) hedge fund in September
1998, for example, focused attention on the excessive leverage available to
such funds under the available regulations and the fact that at the same time
such funds were able to escape from all regulation by the United States Federal
Reserve. Also, there appear to have been “cosy” relationships between hedge
funds, on the one hand, and the investment and commercial banks on the other.
This is another area where there have been frequent and justified calls for
more effective monitoring and regulation by central banks; and questions have
been raised about Western banks’ credit evaluation procedures, which allow
excessively large exposures to hedge funds and other institutions to develop
without proper monitoring. Swift action to repair some of these deficiencies in
the developed market economies could make an important contribution to reducing
instability; not only are these the principal sources of international capital
flows but they are also the countries where both the urgency and the capacity
for reform are greatest. There does not seem to be any reason why such reforms
should have to wait for the more comprehensive proposals for reforming the
international financial system.32
26. Another reaction to the
consequences of the Asian crisis has been for greater stress to be placed on
the need for a more gradual approach to the liberalization of capital accounts
and for effective financial institutions to be in place before capital account
convertibility is introduced. Since the Russian crisis, the impression is often
given that this has always been the approach, but in his resignation letter in
mid-1998 the Chairman of the Interim Committee of the IMF Board of Governors
felt it necessary to warn that it was important to proceed cautiously and with
good advice. No country should be forced to liberalize immediately or to remove
controls when they are justified by legitimate reasons.33 There is also increased acceptance of
direct capital controls of the type applied by Chile, for example, but only as
a temporary and emergency measure.34
27. In most of the reactions to
the Asian crisis and the proposals for reform, only some of which were
mentioned above, the underlying assumption is that capital market instability
can be tamed by better institutional frameworks, better supervision, greater
transparency, and a more careful preparation of transition and developing
economies before they enter the liberalized international environment. Although
all these steps may help, a more fundamental question is whether instability is
inherent to the international capital markets or whether it arises from
inappropriate institutions and unwarranted interference in the market
mechanism. This is in fact a variation on one of the basic issues over which
economists have divided for most of this century — the origins of uncertainty
and the source of dislocation in the system of market coordination. One view,
exemplified by von Hayek, is that uncertainty is created by the distortion or
suppression of information by interfering Governments and central banks; left
alone, individuals will show a natural tendency to coordinate their various
plans in an orderly and predictable manner. The other view, exemplified by
Keynes, located uncertainty and coordination failures not in exogenous sources
but in the system itself. Contrary to Hayek, Keynes thought government could
play a role in reducing uncertainty and raising expectations. The influence of
these two very different points of view about how a market economy works has
dominated the post-war period in roughly equal halves, the Keynesian for some
28 years from 1945 and the Hayekian from roughly 1973.
28. The Keynesian view of the
inherent instability of capital markets was reflected in the original design of
IMF and the post-war international monetary system. Both Keynes and White35 saw the new institution’s primary
function as promoting growth via an open international trading system and the
preservation of financial stability. International capital flows, which of
course were considerably smaller than now, had to be subject to controls
because otherwise it was feared that they would develop an independent
existence of their own and disrupt rather than support international trade. From
the perspective of 1999, when international monetary transactions massively
exceed the value of international trade, those fears seem exceptionally
prescient.36
29. If the view that
instability or volatility is inherent in international capital markets is
accepted, although it may be reduced by better regulation etc., it may be
desirable to accept capital controls as a permanent instrument in the national
policy toolkit and to abandon attempts to include capital account
convertibility as an ultimate objective for all IMF members. Under present
arrangements, legitimate attempts to control foreign capital flows are in fact
made by changing interest rates, but these are clumsy tools for this purpose as
they may conflict sharply with other national objectives, such as growth or
macroeconomic stability. More direct controls, such as those employed in Chile,
would help to contain the disruptive effects of surges in short-term capital
flows on economic growth, which if successful would actually make the environment
more attractive for longer-term direct investment.37 It should also be stressed that most
transition economies possess extremely small financial sectors in relation to
global capital flows, most of which come from the more advanced market
economies. A minor portfolio adjustment for a large hedge fund, such as LTCM,
could deliver a major shock to such an economy. If import surcharges and import
disruption clauses can be provided for under World Trade Organization (WTO)
rules for merchandise trade, it is difficult to see why similar provisions
cannot be allowed in the case of foreign capital flows, especially when the
strongest supporters of capital liberalization claim that the arguments for
liberalizing trade and capital are equivalent.
30. One of the standard
objections to such controls is that it is too late to “turn the clock back”,
that the process of capital liberalization is unstoppable. This is often little
more than self-interested determinism by market operators, and there seems to
be no reason why Chilean-type controls could not be adopted by a country if it
so chooses,38 although it is probably
advisable to introduce them during a period of relative calm in the financial
markets rather than as an emergency measure during a crisis. More to the point,
however, is that the majority of central European transition economies still
retain a wide array of capital controls;39
for the most part, inward direct investment is generally free but controls
remain on many portfolio flows. These have helped to insulate these economies
from the worst effects of financial contagion by the crisis in emerging markets
elsewhere, and it would appear to be unwise to abandon them hastily if at all.
31. Another objection to direct
controls is to argue that if countries dislike the results of foreign capital
inflows they should simply let the exchange rate rise. But this is not very
helpful — how far it would have to rise is uncertain and may increase rather
than ease the country’s problems. In fact if direct controls are ruled out of
court, countries will inevitably seek alternative ways to protect themselves
from instability in the international capital markets, which may be more
damaging to the market economy system. In the absence of alternatives, the need
for such protection will lead to attempts to increase the levels of reserves,
which implies aiming for a current account surplus. By definition, not every
country can achieve this, but if they all try there will be ever stronger
pressure to resort to the traditional range of “beggar my neighbour” policies
which will risk undermining the liberal trading system — precisely the
consequence that was feared by Keynes and White in the 1940s but ignored by the
liberalizers of the 1970s.40
5. Conclusions
32. This brief review of a
selection of current policy attitudes suggests that they share a number of
characteristics. None of them in themselves can be said to be wrong or
undesirable, but the confidence with which they are pursued and applied ignores
the fact that the empirical support for them is more uncertain and more
ambiguous than is usually recognized. In particular, the tendency to downplay
or even ignore the differences in institutional structures, which would appear
to be a major source of the intercountry variations in their acceptance of and
response to market forces,41
increases the risk of outcomes which are not only less than optimal but
actually opposite to those intended. Without the appropriate institutional
infrastructures in place, premature liberalization can cause considerable
damage to economic social systems and create a severe backlash against
programmes for reform and transition to a market economy (there are signs that
since the Asian crisis this is increasingly recognized vis-à-vis the financial
sector42 but the lesson applies
across the board; failure to deal with monopolistic structures, to create
appropriate legal (and enforcement systems), to build patently popular support
for the reform programme43 and so on can all
undermine attempts to create a market economy and drive the existing system
into stagnation or recession rather than create a new basis for sustained
growth. Adapting policies to the particular conditions of individual economies
and taking into account a wider range of factors undermines the simplicity of
the ruling paradigm, but that may well be a price worth paying if the
transition process is ultimately strengthened and opposition to market reforms
diminished by more optimistic expectations.
33. The other characteristic
that most of these policies share is a tendency towards deflation. This is
fairly clear in the case of current policies directed at inflation and
unemployment but is less often acknowledged in the case of attempts to
implement structural reform at a pace which is too rapid to be supported by a
country’s institutional framework. When the required adjustment in structure is
very large — and for most transition economies the requirements are far from
the marginal changes assumed in standard economics textbooks — and the
institutional support for transition very weak, rapid liberalization is
unlikely to lead to growth. The broader conclusion, however, is that growth and
employment have to be restored to a more prominent position among the objectives
of policy. The idea that liberalization, structural reform and economic growth
can be tackled in a temporal sequence is as mistaken for the transition
economies as for the mature Western market economies. Instead, measures
directed at supporting growth need to be introduced alongside stabilization and
reform programmes in order to establish a mutual support between them.44
34. The triumph of capitalism
in the second half of the twentieth century was largely based on its ability to
regain popular legitimacy via the intervention of government to ensure low
levels of unemployment and more acceptable distributional outcomes — capitalism
with a “human face”. This, essentially, was the “third way” and was derived
from a conjunction of the welfare state with Keynesian economic policies
(Keynes, it should be remembered, was a liberal who was acutely aware in the
1930s that if ways were not found to make capitalism more socially acceptable
then the likely outcome would be a swing to one of the two totalitarian
alternatives then on offer). To put it crudely, for any economic system to
survive it must deliver the goods and distribute them in a reasonably equitable
manner. The former centrally planned economies failed this test and they have
been dismantled; but there are many people now living in some of the transition
economies who are wondering whether the new market economy, however embryonic,
will fail the test as well.
35. Another aspect of late
twentieth century capitalism is that it comes in many varieties and is
supported by different institutional arrangements. This tolerance of national
varieties, however, is increasingly under threat from those who see
globalization in normative terms and insist that transition and developing
economies should adopt all the values and institutions of the currently
dominant market economies. This approach, which is partly reflected in the
post-Uruguay agenda of WTO and seeks to harmonize policies and set rules in
areas which have traditionally been regarded as matters for national policy and
national preferences, carries considerable risks. It represents a radical
change from the original philosophy behind the creation of the Bretton Woods
institutions, which was to create an environment of international financial stability
that would underpin the development of world trade and allow countries to
develop according to their own preferences, subject to their avoiding actions
that would “beggar their neighbours”. The pursuit of the globalization agenda,
however, increasingly appears to deny much room for any national preferences
which clash with those of the major market economies.
36. The crucial danger from
this is to the market economy system itself, because economic and social
preferences are closely entwined in the broader framework of social and
political values which underpin a country’s institutions including its form of
economic organization. This is why in previous issues of this Survey there
has been repeated stress on the problems of institutional hiatus in transition
economies and on the necessity to allow them sufficient time — and to provide
them with significant support — to enable the new market institutions to become
embedded in the social and political values of the population and to give the
institutions time to start working effectively. In a few of the Central
European economies, this process is well advanced, but in many others it is
not. If the process does not advance, the new market economies will not
function properly and will not achieve popular legitimacy. But, equally, if
those social and political values — and preferences — are attacked in the name
of the new global economy, the chances are that there will be a backlash
against that economy rather than a change in values. It is therefore not surprising
that an increasing number of distinguished market economists have recently
warned of the dangers of pushing the liberalizing agenda too rapidly and too
widely.
37. The stability of any
socio-political-economic system ultimately rests on three crucial conditions:
(a) whether it has legitimacy, i.e., whether the rules and procedures
according to which authority is conferred and exercised can be justified and
can be seen to be rooted in Adam Smith’s “moral sentiments of the population”;
(b) whether the agreed rules, conventions of behaviour etc. maintain order in
the system by encouraging acceptable behaviour and penalizing the unacceptable;
(c) the welfare outcome, which recognizes that popular support for
institutions and economic arrangements will not be sustained if the
distribution of costs and benefits is considered by too many of the population
to be unjust. The instability in the international financial system in the last
decade, the aggressive pursuit of an ever-widening liberalization agenda, and
the enormously costly turbulence of the last 18 months or so all suggest that
the present global system may be moving closer to violating all three
conditions.
Notes
Table 1
Real GDP in the developed market economies,
1996–1999
(Percentage change over previous year)
|
1996 |
`1997 |
1998 |
1999a |
Western Europe |
2.0 |
2.9 |
2.7 |
1.9 |
Four major countries |
1.5 |
2.3 |
2.4 |
1.5 |
France |
1.6 |
2.3 |
3.1 |
2.2 |
Germany |
1.3 |
2.2 |
2.8 |
1.5 |
Italy |
0.9 |
1.5 |
1.4 |
1.8 |
United Kingdom |
2.6 |
3.5 |
2.3 |
0.5 |
Seventeen smaller countries |
3.1 |
3.9 |
3.3 |
2.5 |
Austria |
2.0 |
2.5 |
3.3 |
2.1 |
Belgium |
1.3 |
3.0 |
2.8 |
2.0 |
Cyprus |
2.0 |
2.5 |
5.0 |
4.0 |
Denmark |
3.3 |
3.1 |
2.4 |
1.6 |
Finland |
4.1 |
5.6 |
4.9 |
3.0 |
Greece |
2.4 |
3.2 |
3.0 |
3.2 |
Iceland |
5.5 |
5.0 |
5.6 |
4.3 |
Ireland |
7.4 |
9.8 |
8.5 |
6.3 |
Israel |
4.7 |
2.7 |
2.0 |
1.7 |
Luxembourg |
3.0 |
4.8 |
4.7 |
3.4 |
Malta |
3.8 |
4.4 |
7.6 |
7.5 |
Netherlands |
3.1 |
3.6 |
3.7 |
2.3 |
Norway |
5.5 |
3.4 |
2.0 |
1.0 |
Portugal |
3.2 |
3.7 |
3.5 |
3.0 |
Spain |
2.4 |
3.5 |
3.8 |
3.4 |
Sweden |
1.3 |
1.8 |
2.9 |
2.0 |
Switzerland |
– |
1.7 |
2.1 |
1.5 |
Turkey |
7.0 |
7.5 |
2.4 |
1.8 |
North America |
3.3 |
3.9 |
3.8 |
3.0 |
Canada |
1.2 |
3.8 |
3.0 |
2.7 |
United States |
3.4 |
3.9 |
3.9 |
3.0 |
Total |
2.7 |
3.4 |
3.3 |
2.4 |
Japan |
5.0 |
1.4 |
-2.9 |
-0.5 |
Total, including Japan |
3.0 |
3.1 |
2.3 |
2.0 |
Memorandum items |
|
|
|
|
European Union |
1.8 |
2.6 |
2.8 |
1.9 |
Euro area |
1.6 |
2.5 |
2.8 |
2.1 |
Source: National statistics and national economic reports.
Note: All aggregates exclude Israel; growth rates of regional aggregates have
been calculated as
weighted averages of growth rates in individual
countries; weights were derived from 1991 GDP data converted from national
currency units into dollars using purchasing power parties.
a Forecasts.
Table 2
Basic economic indicators for the ECE transition economies, 1996–1999
(Rates of change and shares: percentage)
|
GDP (growth rates) |
|
Industrial output (growth rates) |
|
Inflation (percentage change,
December–December) |
|
Unemployment rate (end
of period, percentage) |
||||||||||
1996 |
1997 |
1998 |
1999 official forecast |
|
|
|
|||||||||||
Ex-ante
official forecast |
Actual
outcome |
|
1996 |
1997 |
1998 |
|
1996 |
1997 |
1998 |
|
1996 |
1997 |
1998 |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Europe |
4.1 |
2.8 |
4.3 |
2 |
2.9 |
|
6.0 |
5.6 |
1.4 |
|
.. |
.. |
.. |
|
11.7 |
11.9 |
12.6 |
Albania |
9.1 |
-7.0 |
10 |
8* |
8 |
|
13.6 |
-5.6 |
10* |
|
17.4 |
42.0 |
7.8 |
|
12.3 |
14.9 |
17.6 |
Bosnia and Herzegovinaa |
.. |
.. |
.. |
.. |
.. |
|
87.6 |
35.7 |
23.8 |
|
3.2 |
12.2 |
2.2 |
|
.. |
39* |
.. |
Bulgaria |
-10.1 |
-6.9 |
3.0 |
3* |
3.7 |
|
3.8b |
-10.2 |
-9.4 |
|
311.1 |
578.7 |
0.9 |
|
12.5 |
13.7 |
12.2 |
Croatia |
6.0 |
6.5 |
7.5 |
3* |
1.5-2 |
|
3.1 |
6.8 |
3.7 |
|
3.5 |
4.0 |
5.6 |
|
15.9 |
17.6 |
18.6 |
Czech Republic |
3.9 |
1.0 |
1.4-2.6 |
-2.7 |
-0.8 |
|
2.0 |
4.5 |
1.6 |
|
8.7 |
9.9 |
6.7 |
|
3.5 |
5.2 |
7.5 |
Hungary |
1.3 |
4.6 |
4.0 |
5 |
5 |
|
3.4 |
11.1 |
12.6 |
|
20.0 |
18.4 |
10.4 |
|
10.5 |
10.4 |
9.1 |
Poland |
6.0 |
6.9 |
5.6-5.8 |
4.8 |
4.5 |
|
8.3 |
11.5 |
4.7 |
|
18.7 |
13.2 |
8.5 |
|
13.2 |
10.3 |
10.4 |
Romania |
3.9 |
-6.9 |
– |
-7.3 |
-2 |
|
6.3 |
-7.2 |
-17.0 |
|
56.8 |
151.7 |
40.7 |
|
6.6 |
8.8 |
10.3 |
Slovakia |
6.6 |
6.5 |
5.0 |
4.4 |
3 |
|
2.5 |
1.7 |
4.6 |
|
5.5 |
6.5 |
5.5 |
|
12.8 |
12.5 |
15.6 |
Slovenia |
3.5 |
4.6 |
3.5-4 |
4 |
4 |
|
1.0 |
1.0 |
3.7 |
|
9.0 |
8.8 |
6.6 |
|
14.4 |
14.8 |
14.6 |
The former Yugoslav Republic of Macedonia |
0.8 |
1.5 |
5.0 |
2.9 |
6 |
|
3.2 |
1.6 |
4.5 |
|
0.3 |
4.5 |
-1.0 |
|
39.8 |
42.5 |
.. |
Yugoslaviac |
5.9 |
7.4 |
10.0 |
2.6 |
7 |
|
7.5 |
9.5 |
3.6 |
|
59.9 |
10.3 |
45.7 |
|
26.1 |
25.6 |
27.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baltic States |
4.1 |
7.6 |
6.3 |
4¼ |
4.5 |
|
4.6 |
9.4 |
3.6 |
|
.. |
.. |
.. |
|
6.4 |
6.3 |
7.4 |
Estonia |
4.0 |
11.4 |
5.5-6 |
4.2 |
4 |
|
2.9 |
13.4 |
0.8 |
|
15.0 |
12.3 |
6.8 |
|
5.6 |
4.6 |
5.1 |
Latvia |
3.3 |
6.5 |
5-6 |
4* |
4 |
|
5.5 |
13.8 |
2.0 |
|
13.2 |
7.0 |
2.8 |
|
7.2 |
6.7 |
9.2 |
Lithuania |
4.7 |
6.1 |
7.0 |
4.5 |
5 |
|
5.0 |
3.3 |
7.0 |
|
13.1 |
8.5 |
2.4 |
|
6.2 |
6.7 |
6.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CIS |
-3.4 |
1.1 |
1.2 |
-2¾ |
-1.1 |
|
-3.0 |
2.6 |
-2.3 |
|
.. |
.. |
.. |
|
6.6 |
7.6 |
8.5 |
Armenia |
5.9 |
3.1 |
5-6 |
7.2 |
4 |
|
1.4 |
0.9 |
-2.5 |
|
5.6 |
21.8 |
-1.2 |
|
9.7 |
11.0 |
8.9 |
Azerbaijan |
1.3 |
5.8 |
.. |
10.0 |
9 |
|
-6.7 |
0.3 |
2.2 |
|
6.8 |
0.3 |
-7.6 |
|
1.1 |
1.3 |
1.4 |
Belarus |
2.8 |
11.4 |
7-8 |
8.3 |
4-6 |
|
3.5 |
18.8 |
11.0 |
|
39.1 |
63.4 |
181.6 |
|
4.0 |
2.8 |
2.3 |
Georgia |
11.0 |
11.3 |
11-13 |
2.9 |
8 |
|
6.8 |
8.2 |
-2.7 |
|
13.6 |
7.3 |
11.0 |
|
3.2 |
8.0 |
4.2 |
Kazakhstan |
0.5 |
1.7 |
3.5 |
-2.5 |
1.5 |
|
0.3 |
4.0 |
-2.1 |
|
28.6 |
11.3 |
1.9 |
|
4.1 |
3.9 |
3.7 |
Kyrgyzstan |
7.1 |
9.9 |
3.6 |
1.8 |
2.8 |
|
8.8 |
50.4 |
4.6 |
|
35.0 |
14.7 |
18.3 |
|
4.5 |
3.1 |
3.1 |
Republic of Moldovad |
-7.8 |
1.6 |
3-3.5 |
-8.6 |
-3 |
|
-6.5 |
– |
-11.0 |
|
15.1 |
11.1 |
18.3 |
|
1.5 |
1.7 |
1.9 |
Russian Federation |
-3.5 |
0.8 |
0-0.5 |
-4.6 |
-2.5 |
|
-4.0 |
2.0 |
-5.2 |
|
21.8 |
11.0 |
84.5 |
|
10.0 |
11.2 |
12.4 |
Tajikistan |
-16.7 |
1.7 |
.. |
5.3 |
.. |
|
-23.9 |
-2.0 |
8.1 |
|
40.6 |
159.9 |
2.7 |
|
2.4 |
2.8 |
2.9 |
Turkmenistan |
6.7 |
-11.4 |
.. |
5.0 |
.. |
|
19.7 |
-32.3 |
0.2 |
|
445.8 |
21.5 |
19.8 |
|
.. |
.. |
.. |
Ukraine |
-10.0 |
-3.2 |
0.5 |
-1.7 |
-1 |
|
-5.1 |
-0.3 |
-1.5 |
|
39.7 |
10.1 |
20.0 |
|
1.5 |
2.8 |
4.3 |
Uzbekistan |
1.7 |
5.2 |
6.0 |
4.4 |
4.4 |
|
2.6 |
4.1 |
5.8 |
|
80.0 |
27.5 |
.. |
|
0.3 |
0.3 |
0.4 |
Total |
-0.4 |
2.0 |
2.6 |
-½ |
0.7 |
|
0.1 |
3.8 |
-0.9 |
|
.. |
.. |
.. |
|
8.1 |
8.8 |
9.6 |
Memorandum items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CETE-5 |
5.0 |
5.5 |
4.7 |
3.6 |
3.6 |
|
6.1 |
9.4 |
5.0 |
|
.. |
.. |
.. |
|
11.2 |
9.8 |
10.2 |
SETE-7 |
2.1 |
-3.1 |
3.3 |
-1.9 |
1.3 |
|
5.7 |
-3.9 |
-9.2 |
|
.. |
.. |
.. |
|
12.5 |
14.3 |
15.4 |
Former GDR |
3.2 |
1.7 |
.. |
2.0 |
.. |
|
3.3 |
5.8 |
7.5 |
|
.. |
.. |
.. |
|
17.0 |
20.8 |
18.6 |
Source: National statistics; Commonwealth of Independent States (CIS)
Statistical Committee; direct communications from national
statistical offices to Economic Commission for Europe
(ECE) secretariat (International Monetary Fund and World Bank data for
Albania).
Note: Aggregates are ECE secretariat calculations, based on previous period
weights at 1992 prices. 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 except for Croatia and the former Yugoslav Republic of Macedonia,
for which retail price index is used. Unemployment generally refers to
registered unemployment at the end of the period (with the exception of the
Russian Federation, where it is the Goskomstat estimate of the International
Labour Organization definition, and Estonia, where 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 European transition
economies: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Romania, the
former Yugoslav Republic of Macedonia, and Yugoslavia); Baltic States (Estonia,
Latvia, Lithuania); CIS (12 member countries of the Commonwealth of Independent
States); and total transition economies.
Two dots (..) indicate that data are not available; a dash (–) indicates
that the amount is nil or negligible; an asterisk (*) after a numeral indicates an ECE secretariat estimate.
a Data reported by the
Statistical Office of the Federation; these exclude the area of Republika
Srpska.
b Bulgarian industrial output
indices were recently recalculated according to a new methodology and the old
series reportedly have been revised back to 1991; industrial output now
includes the gross output of all activities of industrial enterprises (and not
just the gross output of “pure” industry, as previously published); the figure
for industrial output growth in 1996 according to the new methodology (3.8 per
cent) differs significantly from the figure for the rate of change of gross
industrial output (-9.1 per cent) reported in the national accounts for the
same year.
c Gross material product instead
of GDP.
d Excluding Transdniestria.
Table 3
International trade and external balances of the ECE transition
economies, 1996–1998
(Rates of change and shares: percentage)
|
Merchandise exports in dollars (growth rates) |
|
Merchandise imports in dollars (growth rates) |
|
Trade balances (per cent of GDP) |
|
Current account (per cent of GDP) |
||||||||
1996 |
1997 |
1998a |
|
1996 |
1997 |
1998a |
|
1996 |
1997 |
1998a |
|
1996 |
1997 |
1998a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Europe |
3.0 |
5.9 |
9.8 |
|
14.5 |
6.5 |
8.6 |
|
-9.6 |
-10.6 |
-9.5 |
|
-3.7 |
-4.3 |
-3.7 |
Albania |
5.3 |
-33.5 |
.. |
|
40.5 |
-32.1 |
.. |
|
-26.0 |
-21.1 |
– |
|
-4.0 |
-12.0 |
-0.9 |
Bosnia and Herzegovina |
141.6 |
87.4 |
22.2 |
|
129.9 |
29.2 |
-32.0 |
|
-41.3 |
-43.3 |
.. |
|
.. |
.. |
.. |
Bulgaria |
-8.5 |
0.5 |
-12.6 |
|
-10.0 |
-3.7 |
2.2 |
|
-1.9 |
0.3 |
-4.0 |
|
0.2 |
4.2 |
-1.0 |
Croatia |
-2.6 |
-7.6 |
6.6 |
|
3.7 |
16.9 |
-2.0 |
|
-16.5 |
-24.5 |
-18.1 |
|
-4.3 |
-12.1 |
-5.4 |
Czech Republic |
4.3 |
2.7 |
17.0 |
|
10.5 |
-1.3 |
5.0 |
|
-10.2 |
-9.2 |
-3.6 |
|
-7.6 |
-6.2 |
-1.2 |
Hungary |
2.2 |
21.6 |
21.3 |
|
4.8 |
17.0 |
21.3 |
|
-5.4 |
-4.7 |
-5.7 |
|
-3.7 |
-2.1 |
-3.7 |
Poland |
6.8 |
5.4 |
6.3 |
|
27.9 |
13.9 |
11.4 |
|
-8.9 |
-11.6 |
-12.5 |
|
-0.9 |
-3.0 |
-3.4 |
Romania |
2.2 |
-4.3 |
-3.3 |
|
11.3 |
-1.4 |
7.4 |
|
-9.5 |
-8.2 |
-8.9 |
|
-7.3 |
-6.7 |
-6.8 |
Slovakia |
2.8 |
0.2 |
8.2 |
|
26.6 |
-8.0 |
6.5 |
|
-12.2 |
-10.5 |
-10.2 |
|
-11.2 |
-6.9 |
-10.1 |
Slovenia |
-0.1 |
0.8 |
7.3 |
|
-0.7 |
-0.7 |
5.5 |
|
-5.9 |
-5.4 |
-5.0 |
|
0.2 |
0.2 |
0.4 |
The former Yugoslav Republic of Macedonia |
-4.7 |
2.8 |
12.8 |
|
-5.4 |
7.8 |
9.6 |
|
-10.8 |
-15.5 |
-14.0 |
|
-6.5 |
-7.4 |
-6.3 |
Yugoslavia |
20.6 |
28.7 |
6.7 |
|
54.3 |
16.7 |
1.3 |
|
-14.2 |
-13.4 |
.. |
|
.. |
-7.2 |
.. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baltic States |
17.6 |
23.0 |
8.3 |
|
26.3 |
26.7 |
14.1 |
|
-18.6 |
-22.0 |
-22.6 |
|
-8.2 |
-9.5 |
-11.3 |
Estonia |
13.2 |
40.9 |
13.0 |
|
27.2 |
37.5 |
15.0 |
|
-26.4 |
-32.4 |
-32.7 |
|
-9.7 |
-12.0 |
-9.7 |
Latvia |
10.7 |
15.9 |
12.9 |
|
27.6 |
17.4 |
22.3 |
|
-17.1 |
-19.0 |
-20.4 |
|
-5.4 |
-6.2 |
-9.7 |
Lithuania |
24.0 |
15.1 |
2.7 |
|
24.9 |
23.8 |
9.5 |
|
-15.3 |
-18.6 |
-19.1 |
|
-9.2 |
-10.2 |
-13.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CIS |
10.2 |
1.8 |
-13.6 |
|
5.9 |
18.7 |
-0.6 |
|
7.0 |
5.4 |
4.7 |
|
1.2 |
-0.5 |
-3.9 |
Armenia |
55.4 |
-12.2 |
8.9 |
|
67.1 |
4.5 |
18.4 |
|
-25.8 |
-28.1 |
-27.3 |
|
-18.3 |
-18.8 |
-21.1 |
Azerbaijan |
-3.1 |
18.1 |
-40.1 |
|
41.4 |
-28.6 |
46.3 |
|
-8.8 |
-1.0 |
-9.3 |
|
-29.2 |
-23.7 |
-30.6 |
Belarus |
6.3 |
1.8 |
-7.4 |
|
25.6 |
21.2 |
13.2 |
|
-3.5 |
-7.1 |
-9.0 |
|
-3.8 |
-6.0 |
-7.4 |
Georgia |
23.3 |
45.1 |
-16.4 |
|
78.7 |
44.1 |
10.2 |
|
-8.2 |
-10.0 |
-11.7 |
|
-6.6 |
-7.0 |
-7.0 |
Kazakhstan |
15.7 |
28.4 |
-3.4 |
|
12.3 |
51.9 |
13.6 |
|
6.9 |
7.0 |
5.3 |
|
-3.6 |
-4.1 |
-4.1 |
Kyrgyzstan |
-20.0 |
154.5 |
4.7 |
|
107.6 |
-21.9 |
59.4 |
|
-13.4 |
0.6 |
-6.3 |
|
-23.7 |
-7.8 |
-19.1 |
Republic of Moldova |
-9.7 |
6.0 |
-14.0 |
|
54.5 |
35.0 |
20.5 |
|
-9.9 |
-15.6 |
-29.9 |
|
-11.1 |
-13.9 |
-23.3 |
Russian Federation |
8.7 |
-1.2 |
-14.9 |
|
-4.9 |
23.3 |
-0.2 |
|
8.8 |
6.7 |
7.1 |
|
2.8 |
0.8 |
-2.7 |
Tajikistan |
-11.6 |
7.7 |
-16.2 |
|
-13.9 |
-6.2 |
-7.4 |
|
14.6 |
22.2 |
6.5 |
|
-7.0 |
-5.4 |
-4.6 |
Turkmenistan |
-42.1 |
-45.5 |
-29.7 |
|
49.3 |
-42.5 |
-15.7 |
|
-17.3 |
-8.6 |
-9.7 |
|
2.0 |
-22.2 |
-25.4 |
Ukraine |
13.4 |
23.6 |
-8.0 |
|
17.1 |
12.7 |
-6.2 |
|
1.3 |
2.8 |
2.6 |
|
-2.7 |
-2.7 |
-4.1 |
Uzbekistan |
94.0 |
-4.4 |
-13.6 |
|
96.0 |
1.9 |
-31.5 |
|
0.9 |
-0.5 |
0.3 |
|
-7.1 |
-3.9 |
-3.4 |
Total |
6.7 |
4.7 |
-0.2 |
|
12.7 |
10.6 |
6.5 |
|
-0.1 |
-1.4 |
-2.7 |
|
-0.9 |
-2.2 |
-4.0 |
Memorandum items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CETE-5 |
4.0 |
6.8 |
12.7 |
|
15.6 |
6.7 |
10.7 |
|
-8.6 |
-9.5 |
-9.1 |
|
-3.3 |
-3.5 |
-3.3 |
SETE-7 |
-0.6 |
2.5 |
-1.4 |
|
8.7 |
4.8 |
3.1 |
|
-11.2 |
-12.4 |
-11.1 |
|
-5.3 |
-6.8 |
-5.4 |
Source: National statistics, Commonwealth of Independent States (CIS) Statistical
Committee and direct communications from national
statistical offices to Economic Commission for Europe
(ECE) secretariat; ECE secretariat computations.
Note: Foreign trade growth is measured in current dollar values. Trade and
current account balances are related to GDP at current
prices, converted from national currencies at current
dollar exchange rates. Trade values include the “new trade” among the successor
States of former Czechoslovakia and the former Socialist Federal Republic of
Yugoslavia, but not intra-CIS trade. Current-price GDP values are in some cases
estimated from reported real growth rates and consumer price indices. On
regional aggregates, see the note to table 1.
Two dots (..) indicate data not available; a dash (–) indicates that the
amount is nil or negligible.
a January–September.
[1] This text is a reproduction of
ECE, Economic Survey of Europe, 1999, chap. I, No. 1. The ECE region
consists of all the countries of Europe, the Commonwealth of Independent States,
North America and Israel.
2 One estimate is that the fall in oil prices by
over one third between the fourth quarters of 1997 and 1998 added a full
percentage point to the increase in consumer spending. See WEFA, US
Financial Markets Outlook, 11 January 1999.
3 The possible effects of the armed conflict in Kosovo are, of
course, not reflected in this assessment of the outlook in 1999.
5 See ECE, “Wage rigidity in western
Europe and North America”, Economic Survey of Europe in 1987–1988.
6 See S. Nickell, “Unemployment and
labour market rigidities: Europe versus North America”, Journal of Economic
Perspectives, vol. 11, No. 3 (Summer 1997).
7 See G. Worswick, “The scope for
macroeconomic policy to alleviate unemployment in Western Europe”, in ECE
Discussion Papers, vol. 2 (1992), No. 3 (United Nations publication, Sales
No. GV.E.92-0-27).
8 See J. Michie, “Unemployment and
economic policy”, Development and International Cooperation, vol. XII,
No. 22 (June 1996).
9 See R. Rowthorn, “Globalization
and employment”, Employment Institute Economic Report, vol. 11, No. 10,
January 1998.
10 See M. Artis, “The unemployment
problem”, Oxford Review of Economic Policy, vol. 14, No. 3 (Autumn
1998).
11 See M. Bruno and W. Easterly,
“Inflation crises and long-run growth”, NBER Working Paper, No. 5209
(Cambridge, Massachusetts, 1995).
14 See J. Stiglitz, “Reflections on
the natural rate hypothesis”, Journal of Economic Perspectives, vol. 11,
No. 1 (1997); despite popular beliefs to the contrary there was no persistent
acceleration in the rate of inflation in the market economies between 1945 and
the late 1960s.
15 Israel also demonstrated in the
1960s that unilateral trade liberalization could be introduced gradually.
16 See D. Greenaway, “Liberalizing
foreign trade through rose tinted glasses”, The Economic Journal,
103(416), January 1993; and D. Rodrik, “Closing the productivity gap: does
trade liberalization really help?”, in G. Helleiner, ed., Trade Policy,
Liberalization and Development (Oxford, Clarendon Press, 1992).
17 See A. Krueger, “Why trade
liberalization is good for growth”, The Economic Journal, vol. 108(450)
(1998).
18 See L. Taylor and J. Ocampo,
“Trade liberalization in developing economies: modest benefits but problems with
productivity growth, macro
prices, and income distribution”, The Economic Journal, vol. 108(450)
(1998).
19 See D. Greenaway, W. Morgan and
P. Wright, “Trade reform, adjustment and growth: what does the evidence tell
us?”, The Economic Journal,
vol. 108(450), 1998.
20 See M. Deppler, remarks made at a
symposium organized by IMF and the Bundesbank, 2 July 1998, reported in IMF
Survey, 27 (14), 20 July 1998,
pp. 225–226; and P. Desai, Going Global, Transition from Plan to Market in
the World Economy (Cambridge,
Massachusetts MIT Press, 1998).
21 See S. Anjaria, “The capital
truth: what works for commodities should work for cash”, Foreign Affairs,
November/December 1998 (the author
is Director of the External Relations Department of IMF).
23 See M. Feldstein and C. Horioka,
“Domestic saving and international investment”, The Economic Journal,
vol. 90(358) (1980).
25 See ECE, “Structural changes in
North-South trade, with emphasis on the trade of the ECE region, 1965–1983”, Economic
Bulletin for Europe, vol.
46 (1994), and R. Kozul-Wright and R. Rowthorn, “Spoilt for choice?
Multinational corporations and the
geography of international production”, Oxford Review of Economic Policy,
vol. 14(2) (Summer 1998).
26 See UNCTAD, Trade and
Development Report 1997 (United Nations publication, Sales No. E.97.II.D.8)
chap. II; R. Kozul- Wright
and R. Rowthorn, “Globalization and economic convergence: an assessment”, UNCTAD
Discussion Papers, No. 131 (February
1998).
27 See ECE, “Surges in capital flows
into eastern Europe, 1990–1996”, Economic Bulletin for Europe, vol. 49
(1997).
29 See UNCTAD-ECE, “The Russian
crisis”, paper prepared by the secretariats of UNCTAD and ECE for the UNCTAD
Trade and Development Board
(Geneva), October 1998, available as press release ECE/GEN/98/2 (16 October
1998), and ECE, Economic Survey
of Europe, 1998, No. 3.
30 See M. Fratzscher, “Why are
currency crises contagious? A comparison of the Latin American crisis of
1994–1995 and the Asian crisis
of 1997–1998, Weltwirtschaftliches Archiv, vol. 134(4) (1998).
31 This is not to deny, however,
that some transition economies are more integrated than others in the
international financial markets (as shown, for example, by the large shares of
domestic securities held by foreigners); in these cases, high levels of
reserves and high real interest rates helped to reduce the contagion effects.
32 On the broader agenda for reform,
see United Nations, “Toward a new international financial architecture”, report
of the task force of the Executive Committee on Economic and Social Affairs of
the United Nations, New York, January 1999 (known as “the Ocampo Report”); and
J. Eatwell and L. Taylor, International Capital Markets and the Future of
Economic Policy: A Proposal for the Creation of a World Financial Authority,
paper available at www.newschool.edu/cepa.
33 See resignation letter of
Philippe Maystadt addressed to the Managing Director of IMF, IMF Survey,
20 July 1998.
34 The Chilean approach includes
sterilized intervention, to avoid excessive appreciation of the exchange rate,
supported by restrictions on short-term capital flows as to minimum entry
amounts and a one-year delay before they can be repatriated. In addition, there
are reserve requirements which differentiate in favour of long-term as against
short-term capital inflows. The advantage of these types of control over the
much-discussed Tobin tax on foreign exchange transactions is that they can be
applied by individual countries whereas the tax requires wholesale
international compliance.
35 Harry Dexter White was chief
international economist at the United States Treasury in the early 1940s, and
along with Keynes was one of the two principal architects of IMF and the World
Bank.
36 Capital controls came to an end with
the collapse of the Bretton Woods system of fixed exchange rates in the early
1970s; that collapse, by transferring the management of foreign exchange risk
to the private sector, was a major factor behind the general move to financial
deregulation in the 1970s (see Eatwell and Taylor, op. cit.).
37 The distinction between short-
and long-term investment becomes increasingly less significant with full
capital account convertibility as access to modern derivatives markets can be
used to reduce the differences in liquidity between different assets.
38 On the effectiveness of capital
controls in a number of developing countries and on the dangers of capital
account liberalization in a global system that has still to find ways to
prevent the international transmission of financial shocks, see UNCTAD, Trade
and Development Report, 1998 (United Nations publication, Sales No.
E.98.II.D.6), especially chap. IV.
39 Slovenia is often singled out as
an economy where capital controls have helped to maintain stability in the
domestic economy. See H. Davidson, “Slovenia’s splendid isolation”, Central
European, November 1998. A useful summary of selected capital controls in
11 transition economies is given in R. Feldman et al., Impact of EMU on
Selected Non‑European Union Countries, IMF Occasional Paper, No. 174
(Washington, D.C., 1998), table 2.9. According to the IMF index of capital
account liberalization (varying from zero to 100, the latter representing
maximum liberalization), the least liberalized country was Romania (12.5) and
the most was the Czech Republic (73.7). for Hungary it was 59.5 and for Poland
55.3; for all the others it was under 50.
40 The Secretary-General of UNCTAD
recently emphasized the role of financial instability in bringing about the
collapse of world trade growth from almost 10 per cent in 1997 to some 3.7 per
cent in 1998. R. Ricupero, keynote address to the high-level symposium on trade
and development, Geneva, 17 March 1999.
41 Although some of these
institutional arrangements are inimical to market forces and decentralized
decision-making, there is no unique set of institutions which describe a market
economy. Capitalism comes in a number of institutional variations.
42 “Now we know that the
incentive structure — critical for the behaviour of people and firms — is not
only indicated by prices. Prices are critical, markets are absolutely
essential, but they are not the only things that create the incentive structure
of the economy. It’s institutions as well”, taken from “Institutions matter,
says chief economist for Latin America”, World Bank News, 2 July 1998
(emphasis added).