Turmoil at Twenty

Recession, Recovery, and Reform in Central and Eastern Europe and the Former Soviet Union

Pradeep Mitra, Marcelo Selowsky, Juan Zalduendo

• Publisher: World Bank
• Year: 2010
• eBook ISBN: 9780821381137
• Topic: Economics
• Subtopic: Economic Conditions
• Index: Economics

This book, written on the eve of the 20th anniversary of the fall of the Berlin wall in 1989, addresses three questions that relate to recession, recovery, and reform, respectively, in Europe and Central Asia (ECA) transition countries. Did the transition from a command to a market economy and the period when it took place, plant the seeds of vulnerability that made transition countries (the region excluding Turkey) more prone to crisis than developing countries generally? Did choices made on the road from plan to market shape the ability of affected countries to recover from the crisis? What structural reforms do transition countries need to undertake to address the most binding constraints to growth in a world where financial markets have become more discriminating and where capital flows to transition and developing countries are likely to be considerably lower than before the crisis? This report is structured as follows: chapter one of the book analyses how countries fell into recession and crisis, why not all of them were equally affected, and whether different policies could have positioned them better to face the crisis. Chapter two discusses rescue and stabilization and the role of international collective action. The next two chapters focus on policies for recovery, chapter three on restructuring bank, corporate and household debt and chapter four on scaling up social safety nets. Chapters five and six focus on reform, examining the binding constraints to growth and the policy agenda in the most important sectors identified by that analysis.

Table of contents

• Table of contents
• Acknowledgments
• Overview
• 1 Prelude to the crisis
• 2 How much adjustment? How much financing?
• 3 Restructuring bank, corporate, and household debt
• 4 Scaling up social safety nets
• 5 Prioritizing structural reform
• 6 The day after
• Bibliography
• Box 1.1 Shades of vulnerability—a cluster analysis approach to classifying countries
• Box 1.2 Playing cat and mouse—staying ahead of regulation arbitrage in Southeastern Europe
• Box 1.3 Why foreign currency lending did not take off in the Czech Republic
• Box 2.1 Sticking together through thick and thin: the European Bank Coordination (Vienna) Initiative
• Box 2.2 From Bangkok to Budapest: ECA’s adjustment compared with East Asia’s
• Box 2.3 Countercyclical fiscal policy in financially integrated countries: Kazakhstan and the Russian Federation
• Box 2.4 Tajikistan’s declining remittances can hurt the poor disproportionately
• Box 2.5 Foreign ownership and funding sources
• Box 3.1 ECA’s growth prospects—green shoots? Maybe. High growth rates? Unlikely
• Box 3.3 An agenda for modern banking sector institutions in ECA countries
• Box 3.4 Capital—what is it and why require it?
• Box 3.5 Taking the rough with the smooth—dynamic provisioning in Spain
• Box 4.1 Aiming high to serve the poor: Georgia’s new Targeted Social Assistance Program
• Box 4.2 Enough bang for the buck? Safety nets in the Russian Federation
• Box 5.1 Transition economies converge in structure to market economies
• Box 5.2 Comparing constraints in transition (BEEPS 1999–2005) and nontransition (ICA) countries
• Box 6.1 Electricity tariff increases and poverty impacts
• Box 6.2 Ukraine norms for education facilities
• Figure 1 Means-tested safety nets: targeting accuracy, coverage, and transfers to the poorest quintile
• Figure 1.1 Income convergence with EU15, by country, 1999 and 2008
• Figure 1.2 Trade integration, by region, 1994–2008
• Figure 1.3 Financial integration, by region, 1994–2008
• Figure 1.4 Labor integration, by country, 2007 and 2008
• Figure 1.5 Capital flows in developing East Asia
• Figure 1.6 Capital flows in Europe and Central Asia
• Figure 1.7 Capital flows in Latin America and the Caribbean
• Figure 1.8 Capital flows in other emerging economies
• Figure 1.9 Real GDP growth, median values, 2000–08
• Figure 1.10 Current account, net of FDI, median values, 2000–08
• Figure 1.11 Inflation, median values, 2000–08
• Figure 1.12 Fiscal balance, median values, 2000–08
• Figure 1.13 External debt to GDP, median values, 2000–08
• Figure 1.14 Ratio of short-term debt to foreign exchange, median values, 2000–08
• Figure 1.15 Current account, net of FDI, median per group, 2000–08
• Figure 1.16 Fiscal balance, median per group, 2000–08
• Figure 1.17 External debt to GDP, median per group, 2000–08
• Figure 1.18 Short-term debt to foreign exchange reserves, median per group, 2000–08
• Figure 1.19 Bank ownership patterns in Europe and Central Asia transition economies, 1997 and 2005
• Figure 1.20 Banking crises in transition economies, 1990–2002
• Figure 1.21 Average return on equity, parent banks and competition, 2004–08
• Figure 1.22 Average return on assets, parent banks and competition, 2004–08
• Figure 1.23 Private sector credit to GDP, median value, 2000–08
• Figure 1.24 Loans to deposits, median value, 2000–08
• Figure 1.25 Foreign exchange assets to liabilities, median value, 2000–08
• Figure 1.26 Liabilities to equity, median value, 2000–08
• Figure 1.27 Private sector credit developments in 2005–08: catch-up or excess?
• Figure 1.28 Real housing price developments
• Figure 1.29 Exchange rate regimes
• Figure 1.30 Average policy outcome/stance: exchange rate flexibility, by group and period
• Figure 1.31 Average policy outcome/stance: fiscal policy, by group and period
• Figure 1.32 Average policy outcome/stance: monetary conditions, by group and period
• Figure 1.33 Average policy outcome/stance: nominal exchange rate volatility, by group and period
• Figure 1.34 Policy response to balance-of-payment pressures: exchange rate flexibility, by group and period
• Figure 1.35 Policy response to balance-of-payment pressures: fiscal policy, by group and period
• Figure 1.36 Policy response to balance-of-payment pressures: monetary policy conditions, by group and period
• Figure 1.37 Policy response to changes in net foreign assets: sterilization of foreign exchange, by group and period
• Figure 1.38 Median real GDP growth, by group and period
• Figure 1.39 Median current account balance, by group and period
• Figure 1.40 Change in real effective exchange rate, by group and period
• Figure 1.41 Policy response to balance-of-payment pressures: real eff ective exchange rate, by group and period
• Figure 1.1.1 Country-specific components of EMBI spreads
• Figure 1.2.1 Financial deepening in ECA’s transition economies, median values, 1995–2007
• Figure 1.2.2 Bank efficiency in ECA’s transition economies, median values, 1995–2007
• Figure 1.2.3 Private credit to GDP versus GDP per capita, ECA’s transition economies versus other regions, 1995 and 2007
• Figure 2.1 Mean private capital flows during the East Asian capital account crisis
• Figure 2.2 Crisis, adjustment, and financing in financially integrated Europe and Central Asia economies
• Figure 2.3 Crisis, adjustment, and financing in financially integrated oil-exporting Europe and Central Asia economies
• Figure 2.4 Public and private sector balances in low-income and lower middle-income CIS countries, 2008–10
• Figure 2.5 Banking sector credit—national and domestic sources
• Figure 2.6 International claims, end-2008
• Figure 2.7 Foreign claims, end-2008
• Figure 2.8a Foreign exchange liabilities, Republic of Korea and financially integrated ECA countries
• Figure 2.8b Foreign exchange liabilities, Republic of Korea and financially integrated ECA countries
• Figure 2.9 Wholesale funding, by country, 2007–09
• Figure 2.10 Resident retail deposits, by country, 2007–09
• Figure 2.11 Parent bank funding, by country, 2007–09
• Figure 2.12 Ratio of liquid assets to total assets, by country, March 2009
• Figure 2.13 Loans with a maturity of five years or more, by country, 2007–09
• Figure 2.14 Sectoral composition of loans, by country, March 2009
• Figure 2.15 Currency composition, by country, March 2009
• Figure 3.1a Average duration and change in output of recessions, by type
• Figure 3.1b Average duration and change in output of recoveries, by type
• Figure 3.2 Household debt, by country, 2008
• Figure 3.3 Household debt, earlier EU members, 1995–2004
• Figure 3.4 Composition of household debt, by country, end-2008
• Figure 3.5 Foreign currency-denominated loans, by country, 2008
• Figure 3.6 Mortgage loans with adjustable interest rates, by country, 2006
• Figure 3.7 Mortgage interest service and interest rate shock, by income quintile
• Figure 3.8a Total debt service under shocks
• Figure 3.8b Total debt service under shocks
• Figure 3.9a Ratio of actual to minimum required capital-asset ratio
• Figure 3.9b Supervisory agency can legally declare a bank insolvent
• Figure 4.1 Spending on overall safety nets, by country, 2006–08
• Figure 4.2 Coverage of overall safety nets, by country, various years
• Figure 4.3 Targeting accuracy of overall safety-net benefits, by country, various years
• Figure 4.4 How ready are ECA’s safety nets for rapid crisis response? A typology of countries
• Figure 4.5 Targeting accuracy of means-tested programs, by country, 2004–08
• Figure 4.6 Coverage of means-tested programs, by country, 2004–08
• Figure 5.1 Average business environment constraint: transition economies in 1999, 2002, 2005, 2008, and nontransition economies
• Figure 5.2 Infrastructure composite bottlenecks, 1999–2008
• Figure 5.3 Infrastructure bottlenecks—electricity, 1999–2008
• Figure 5.4 Infrastructure bottlenecks—transport, 1999–2008
• Figure 5.5 Access to land, 1999–2008
• Figure 5.6 Skills bottlenecks, 1999–2008
• Figure 5.7 Corruption, priority measure, 1999–2008
• Figure 5.8 Crime/theft/disorder: priority measure, 1999–2008
• Figure 5.9 Tax administration: priority measure, 1999–2008
• Figure 5.10 Customs regulations: priority measure, 1999–2008
• Figure 5.11 Financing expansion—internal finance
• Figure 5.12 Financing expansion—external financing, constraint level
• Figure 5.13 Financing expansion—external financing, constraint priority
• Figure 5.14 Physical infrastructure: (composite) priority measure, 1999–2005
• Figure 5.15 Skills: priority measure, 1999–2005
• Figure 5.16 Legal environment: priority measure, 1999–2005
• Figure 5.17 Labor regulation: priority measure, 1999–2005
• Figure 5.1.1 Demand and supply of public goods—one country, two firms
• Figure 5.1.2 Demand and supply of public goods
• Figure 5.1.3 Two transition economies, two nontransition economies (and many firms)
• Figure 6.1 Relative importance of constraints, by country groups
• Figure 6.2 Investment commitments in electricity with private participation, 1993–2007
• Figure 6.3 Evolution of average collection rates in ECA countries
• Figure 6.4 Weighted average electricity tariffs, 2008 (US cents per kilowatt-hour, excluding taxes)
• Figure 6.5 Present structure of ECA electricity markets
• Figure 6.6 Worker education: percentage of firms considering it a “major” or “very severe” constraint in 2008
• Figure 6.7 Worker education: change in the frequency of satisfied firms between 2005 and 2008
• Figure 6.8a 2007 TIMSS—mean content scores in grade 4 math
• Figure 6.8b 2007 TIMSS—mean cognitive scores in grade 4 math
• Figure 6.8c 2007 TIMSS—mean content scores in grade 4 science
• Figure 6.8d 2007 TIMSS—mean cognitive scores in grade 4 science
• Figure 6.9a 2007 TIMSS—mean content scores in grade 8 math
• Figure 6.9b 2007 TIMSS—mean cognitive scores in grade 8 math
• Figure 6.9c 2007 TIMSS—mean content scores in grade 8 science
• Figure 6.9d 2007 TIMSS—mean cognitive scores in grade 8 science
• Figure 6.10a PISA math scores
• Figure 6.10b PISA science scores
• Figure 6.11a PISA reading scores—difference between quintile 5 and quintile 1
• Figure 6.11b PISA math scores—difference between quintile 5 and quintile 1
• Figure 6.12 Positive and negative shifts in employment participation in 1995–2006, by occupation
• Figure 6.13 Kazakhstan survey of fi rms, 2008: importance of general competencies and technical skills
• Map 1 Income convergence to the EU15 average income, 2000–09
• Table 1 Credit market characteristics in financially integrated countries
• Table 1.1 Savings–investments balance
• Table 1.2 Evolution of banking sector indicators, by country, 1999–2008
• Table 1.3 Growth and composition of credit to the private sector
• Table 1.2.1 Comparing ECA’s transition economies with other regions
• Table 2.1 Savings–investment balances, adjustment without official financing
• Table 2.2 Savings–investment balances, adjustment with official financing
• Table 2.3 Direct lending as a share of total national credit, by country, 2005–09
• Table 2.4 International claims, by country, 2000–09
• Table 2.5 Stability of funding sources
• Table 2.6 Index of home country concentration of parent bank exposure, international claims
• Table 2.7 Importance of lending in foreign exchange among parent-subsidiary banks
• Table 2.1.1 Comparison of information on claims in BIS data
• Table 2.1.2 Sectoral breakdown in BIS data
• Table 3.1 Countries with banking and currency crises and nonperforming loans as a share of total loans
• Table 3.2 Credit losses—extrapolating from past crisis events
• Table 3.3 Median nonfinancial corporate leverage, Europe and Central Asia countries and EU cohesion countries, 1999–2008, and comparator countries for years of crisis
• Table 3.4 Median nonfinancial corporate leverage, by country, 2008
• Table 3.5 Median interest coverage in nonfinancial firms, Europe and Central Asia countries and EU Cohesion countries, 1999–2008, and comparator countries for years of crisis
• Table 3.6 Median interest coverage ratio in nonfinancial firms, by country, 2008
• Table 4.1 Transfer to beneficiaries in the poorest quintile, by country, various years
• Table 4.2 Percentage of transfers through means-tested programs to overall safety net transfers, by country, various years
• Table 5.1 Levels and priorities of constraints on business in BEEPS 4 and other surveys
• Table 6.1 Total technical and commercial losses in ECA countries
• Table 6.2 Regulatory institutions in ECA countries
• Table 6.3 Implementation of the directive 2003/54/EC in the contracting parties to the treaty establishing the energy community, December 2008
• Table 6.4 Features of electricity systems in Central Asia
• Table 6.5 Russian Federation—wage premia for additional schooling
• Table 6.6 Students tutored by their own teachers