Macroeconomic performance and prospects
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The past ten years have been a turbulent period for the countries of central and eastern Europe and the Baltic states (CEE) and the Commonwealth of Independent States (CIS). The scale and speed of economic change in some countries have been breathtaking at times. In other countries, changes have occurred more gradually. Growth rates have been impressive in recent years in several cases, but disappointing in others. In some countries growth has been sustained for over half of the decade, some have experienced setbacks after several years of growth, while others have yet to see the first year of economic recovery.
Many important lessons from the first ten years of transition emerge from a close examination of the significant differences in macroeconomic performance between countries. The starting points for each country differed widely across the region. The transition economies inherited different degrees of structural as well as macroeconomic distortions, were integrated to varying extents into the world market, and covered a wide spectrum of income levels and living conditions. Some countries had introduced limited market reforms a long time before the general collapse of communism at the end of the 1980s, whereas others had adhered rigidly to central planning for as long as possible. There has been large variation across the region in the commitment of governments to stabilisation programmes and structural reforms. Partly as a result of these differences, countries have differed enormously in macroeconomic outcomes.
This chapter provides an overview of macroeconomic developments during the transition and examines the principal reasons for the wide disparity in performance across the region. The chapter begins by summarising the main facts over the last ten years with regard to output, employment and productivity, inflation, fiscal and external imbalances, and capital inflows (see Section 3.1). It then proceeds to analyse the first half of the 1990s, the so-called "transition recession" period when all economies in the region suffered significant declines in output and rising inflation. Different explanations have been offered as to why some countries recorded smaller initial output declines and recovered more quickly than others: some explanations stress the differences in starting points, others emphasise the importance of credible stabilisation policies, while a third set of reasons points to the role of structural reforms.
Section 3.2 assesses the validity of each explanation. It concludes that initial conditions have a lasting effect on performance, both directly through the impact on the cost of restructuring and indirectly by delaying progress on structural reform. Stabilisation is necessary but not sufficient for sustained growth. If structural reforms are not carried out, stabilisation may not be sustainable and any recovery will be short-lived.
Section 3.3 focuses on the recent macroeconomic reversals that have occurred in a number of countries. Reversals in output and inflation have occurred both because of internal, country-specific factors and because of external pressures, such as the crisis in East Asia, the oil price declines and the effects of the crisis in Russia. Althoughthe circumstances underlying each reversal differ from one country to the next, a common theme of all reversals is the link between structural reforms and macroeconomic performance, including vulnerability to external pressures.
Lastly, Section 3.4 reviews briefly recent macroeconomic developments across the region, and concludes by assessing prospects for economies in the region in both the short and medium term and some of the main challenges that remain to be addressed. These include EU accession-related challenges for most of central Europe and the Baltic states, post-war Balkan reconstruction for some of the less advanced countries of south-eastern Europe, and building the foundations for sustainable growth for Russia and other CIS countries. The chapter contains two annexes. Annex 3.1 provides a comprehensive set of tables on the macroeconomic performance of transition economies over the past ten years. Annex 3.2 considers in some detail the implications of the Kosovo crisis for macroeconomic performance in the Balkan region as well as recent proposals for its reconstruction.
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