Stabilizing Ukraine


moghadamsmallBy Reza Moghadam

(Version in Русский and Español)

Even before geopolitical tensions unleashed currency flight, bank deposit withdrawals and surging risk premiums, Ukraine faced serious challenges. The crisis there has been years in the making, reflecting deep structural problems that left it vulnerable to periodic funding shortfalls and near the bottom of transition country league tables. Thus, any program to tackle the immediate crisis in Ukraine must inevitably come to grips with this legacy.

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Central, Eastern, and South-Eastern Europe: Safeguarding the Recovery as the Global Liquidity Tide Recedes


By Reza Moghadam, Aasim M. Husain, and Anna Ilyina

(Version in Türk)

Growth is gathering momentum in most of Central, Eastern, and South-Eastern Europe (CESEE) in the wake of the recovery in the euro area. Excluding the largest economies—Russia and Turkey—the IMF’s latest Regional Economic Issues report  projects the region to grow 2.3 percent in 2014, almost twice last year’s pace. This is certainly good news.

Figure 1

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Europe’s Economic Outlook


moghadamsmallBy Reza Moghadam

Economic growth across Europe is slowly picking up, which is good news. But the recovery is still modest and measures to boost economic growth and create jobs are important.

Western Europe: picking up the pace

The recovery projected last October for the euro area has solidified. This is reflected in our revised forecasts—e.g., the 2014 forecast for the euro area is up from 1 percent last October to 1.2 percent now, with important upgrades in countries like Spain. These revisions reflect the stronger data flow on the back of past policy actions, the revival of investor confidence, and the waning drag from fiscal consolidation. The positive impact on program countries is palpable—improving economies, lower spreads, and evidence of market access. We’ve also seen a welcome pick-up in growth in the UK (almost 3 percent is expected for 2014).

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Global Financial Stability: Beginning To Turn The Corner


GFSRBy José Viñals

(Version in  EspañolFrançaisРусский中文 and 日本語)

 

Global financial stability is improving—we have begun to turn the corner.

But it is too early to declare victory as there is a need to move beyond liquidity dependence—the central theme of our report—to overcome the remaining challenges to global stability.

Progress

We have made substantial strides over the past few years, and this is now paying dividends.  As Olivier Blanchard discussed at yesterday’s press conference of the World Economic Outlook, the U.S. economy is gaining strength, setting the stage for the normalization of monetary policy.

In Europe, better policies have led to substantial improvements in market confidence in both sovereigns and banks.

In Japan, Abenomics has made a good start as deflationary pressures are abating and confidence for the future is rising. And emerging market economies, having gone through several recent bouts of turmoil, are adjusting policies in the right direction.

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Growing Institutions? Grow the People!


By Sharmini Coorey

(Version in Español)

“When you speak about institutions, in fact, you are speaking about the people.” These words, by Kosovo’s central bank governor Gani Gergüri at a recent conference in Vienna, capture an important truth that is often overlooked when we economists discuss amongst ourselves: without sound institutions, it’s very hard to achieve sustainable economic growth.

And the quality of those institutions hinges on the quality of the people running them―their educational background and training, and the prevailing business culture and approach to policymaking.

The work of Douglass North and the school of thought known as the new institutional economics has taught us that differences in deep institutions—defined as the formal and informal rules of economic, political and social interactions—are responsible for sustained differences in economic performance. This is also the central thesis in Acemoglu and Robinson’s fascinating new book, Why Nations Fail.

Inclusive (as opposed to extractive) economic and political institutions are central in nations’ efforts to avoid stagnation and ensure sustained prosperity. This is because sustained prosperity is a dynamic process of constant innovation and a never-ending cycle of Schumpeterian creative destruction, which can only be supported by open, inclusive institutions. Their thesis is certainly consistent with the contrasting experience of different countries in Central, Eastern and Southeastern Europe under communism and during the past two decades.

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Convergence, Crisis, and Capacity Building in Emerging Europe


by Nemat Shafik

Central, Eastern and Southeastern Europe has been through a lot. In two short decades, the region moved from a communist planned system to a market economy, and living standards have converged towards those in the West.

It has also weathered major crises: first the break-up of the old Soviet system in the early 1990s, then the Russian financial crisis in 1998, and finally the recent global economic crisis. How did these countries do it?

From the Baltic to the Balkans, the region’s resilience and flexibility are the result of hard work and adaptability. But more than anything, it is the strong institutions built over the last two decades that have enhanced the region’s ability to deal with the momentous challenges of the past, the present—and those to come.

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Lost & Found in Eastern Europe: Replacing Funding by Western Europe’s Banks


By Bas Bakker and Christoph Klingen

With Western Europe’s banks under pressure, where does this leave Europe’s emerging economies and their financial systems that are dominated by subsidiaries of these very same banks?  There is little doubt that the era of generous parent-funding for subsidiaries is over.  But parent bank deleveraging—selling off assets, raising capital, and reducing loans, including to their subsidiaries—need not translate into a reduction of bank credit in emerging Europe.

A credit crunch can be avoided as long as parent banks reduce exposures gradually and domestic deposits, other banks, and local financial markets fill the void. Policymakers should create the conditions for this to happen.

The ties that bind

The dependence of the banking systems in emerging Europe on Western European banks is well known:

  • Ownership— foreign banks control more than half of the banking systems in most of Central, Eastern, and Southeastern Europe. Their share exceeds 80 percent in Bosnia, the Czech Republic, Croatia, Estonia, Romania, and Slovakia. Only in Russia, Ukraine, Belarus, Moldova, Slovenia, and Turkey do they not dominate.

Reigniting Growth in Emerging Europe


By Marek Belka

As the deep recession in Europe’s emerging market countries finally comes to an end, the question on everyone’s minds is where  growth in the region will come from in the years ahead. Exports are rebounding, and domestic demand is showing signs of stabilization. Most countries will see positive GDP growth this year—a stark difference from 2009. But a return to the high growth rates that preceded the crisis is highly unlikely.

An unbalanced picture

During the boom years, Eastern Europe grew rapidly, but growth in many countries was rather unbalanced. Capital inflows were large, but to a great extent went to the “non-tradable” sector—in particular, real estate, construction, and banking. Capital flows boosted domestic demand rather than supply—leading to a surge in imports, current account deficits that widened to unprecedented levels, and overheating economies.

This kind of growth will not come back. The domestic demand boom came to an end in the fall of 2008.  In the global financial turmoil that followed the demise of Lehman Brothers, capital flows to Eastern Europe plunged, leading to a sharp decline in domestic demand. Further exacerbated by a decline in exports, this contributed a deep economic downturn—in the Baltics and Ukraine, GDP declined between 14 and 19 percent last year.

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Life after the Crisis: A Perspective from Emerging Europe and Central Asia


By Caroline Atkinson

The Program of Seminars takes place outside the formal framework of the Annual Meetings. But to many people, they were the main reason for making the trip to Istanbul.

The program’s October 4 offering included a first-hand perspective of how three emerging market countries—Turkey, Slovakia, and Ukraine—have weathered the crisis. We also got a glimpse of the methodology the IMF is using to become better at sounding the alarm if it sees new vulnerabilities building up in the world economy.

More Europe, not less

Ukraine was running a high fiscal deficit at the outset of the crisis, which made it vulnerable when the global economy came unstuck, Vice Prime Minister Hryhoriy Nemyria said. The lack of progress on structural reforms had reinforced the external shock, and had brought home just how dependent the country was on just one sector, steel, which accounts for 40 percent of all export earnings. Continue reading
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