Impact of the economic crisis on new EU member states, CIS, Balkan economies

1
Impact of the economic crisis on new EU member
states, CIS, Balkan economies

• Ben Slay
• Senior economist
• UNDP Bureau for Europe and CIS
• 19 June 2009

2
Global economic crisis Regional dimensions

• Break in economic growth Stagnation or recession
  for most new EU member states, Balkans, CIS
  (emerging market) economies
• Increases in
• Income poverty, inequality
• Other dimensions of poverty
• Much development progress could be lost
• When growth resumes
• How strong will it be?
• Will it be driven by
• Recovery growth?
• Favourable external conditions?
• Reforms?

3
Transition and growth 1990-2008

• Transition created J- or U-shaped economic
  growth paths, reflecting
• Transition recession
• Recovery growth
• Typical of almost all transition economies
• Irrespective of energy prices, EU membership

Transition recession
Recovery growth
Transition recession
4
Growth matters for poverty reduction (inverted
U)
Millions living in absolute income poverty in
CIS, Turkey, Balkans, new EU member states. World
Bank data, using 2005 PPP exchange rates.
5
Poverty rose after 1998 Russian financial crisis
Absolute income poverty, measured against
PPP4.30/day threshold. World Bank data.
6
Growth, poverty, and human development

• Reductions in income poverty are goodbut human
  development is better
• Non-income dimensions of povertyalso important
• Health
• Education
• Equality
• Development Choices, freedoms, opportunities
• UNDPs human development index measures
• Per-capita GDP (in PPP terms)
• Education attainment
• Life expectancy

7
Hit worse than other emerging market regions?
Regional GDP growth trends
Source IMF World Economic Outlook, April 2009
8
Lithuania, neighbours Particularly hard hit
Source IMF World Economic Outlook, April 2009
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Contagion Transmission mechanisms

• Trade shocks
• Prices (terms of trade effects)
• Quantities (falling export demand)
• Falling remittances
• Financing gaps are harder to fill
• Crisis impact magnified by large current account
  deficits
• Greater declines in domestic demand as spending
  shrinks with capital outflows

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Trade in EU NMS drops sharply in 2009Q1 . . .
Change relative to 2008Q1, in euros. Source
Eurostat.
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. . . And in CIS too
Change relative to 2008Q1, in dollars. Source
CIS Statistical Office.
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Trade shock Russian, EU import trends
Crisis hits home
Year-on-year changes in imports, in value terms.
Sources Eurostat, CBR.
13
Terms of trade shock Exports prices collapse

• These trends are good for food and energy
  importers in Europe, but . . .
• . . . Most CIS countries export primary
  products
• Energy Azerbaijan, Kazakhstan, Russia,
  Turkmenistan
• Metals Albania, Armenia, Georgia, Kazakhstan,
  Kyrgyzstan, FYROM, Russia, Serbia, Tajikistan,
  Ukraine, Uzbekistan
• Food/Cotton Kazakhstan, Moldova, Ukraine,
  Uzbekistan

World price trends (June 2008100)
IMF data
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Remittances Whos most at risk?
Remittances as of GDP. Source World Bank, 2007
data.
15
Remittances in Tajikistan Dropping sharply
Quarterly growth in remittances (year-on-year)
Sources National Bank of Tajikistan, IMF.
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Refinancing Current account balances (2008)
No refinancing issues
Significant refinancing issues are present. Much
depends on FDI, concessional finance (IMF)
Significant refinancing issues are present
Shares of 2008 GDP. Sources IMF, EIU.
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Macroeconomic, trade policy responses

• Coordinated fiscal, monetary expansion by those
  able to do so (US, EU, Japan, China)
• Longer-term inflationary impact?
• IMF rescue packages to prevent global financial
  contagion
• New programmes concentrated in Europe, CIS region
• Coordinated with European Commission, bilateral
  donors
• Keep markets open, resist protectionism

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Global governance response

• Repairing global financial architecture
• Larger role, more resources for IMF, World Bank
• More effective global financial market regulation
• Financial stability forum
• Managing new development environment
• Less ODA from OECD-DAC countries
• Role for new EU donors?
• Climate change
• Post-Kyoto climate change regime
• Pricing carbon
• Demographics and migration

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Policy responses in EU NMS, SEE, CIS countries

• Many dont have fiscal space needed to boost
  domestic demand
• Most must wait for EU, Russia trade to recover .
  . . and hope that protectionism can be avoided
• Better regulation of financial systems, to
• Reduce capital outflows
• Keep/restore public confidence in domestic banks
• More effective social policies, via
• Increase share of GDP for social protection
• Better targeting of social protection

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Can social safety nets protect the poor?
Source World Bank. Social insurance (e.g.,
pensions) not included
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Social policy reform implications
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Questions for the future

• How long will the recession last?
• Recovery in 2010? 2011?
• How much development progress will be lost?
• When growth resumes
• How strong will it be?
• Will it be driven by
• Recovery growth?
• Favourable external conditions?
• Reforms?
• Prospects for improvements in global economic
  governance?

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Estonia