Since the fall of the Berlin Wall nearly a decade ago, the former centrally planned economies of Central and Eastern Europe and the Baltics, Russia, and other former Soviet Union countries have made major strides in moving toward market-based economies. Initially, this historic transformation was accompanied by considerable price and output instability. In many countries, stabilization programs supported by the IMF and the World Bank helped contain this instability and bolstered the momentum for structural reforms. Yet by 1998, only countries in Central Europe had achieved sustained growth and recovery from the recession that followed the transition. And even in that region, Albania, Bulgaria, and Romania suffered setbacks during 1996–97. The crisis that beset Russia in 1998 not only exacerbated the recession in the region, it highlighted the key challenge of transition: achieving sustained economic growth.
Rapid credit growth is one of the most pervasive developments in recent years in the countries of Central, Eastern, and South-eastern Europe (CEE). The benefits of this growth are unquestioned; but so are the potential risks.
Among the major objectives of public policy worldwide have been financial system stability and efficiency. Several experiences of financial crises in the 1990s have reinforced the view that, in the design and implementation of policies for effective macroeconomic management, it is important to pay serious attention to risk, efficiency, and governance in financial systems and markets.
Since the adoption of the Millennium Development Goals (MDGs) in 2000, the challenge of reducing poverty around the world has been more prominent on the agenda of the international community.1 Relatively slow progress toward meeting the MDGs by the 2015 target date has added to the urgency of this effort. Two influential reports—the United Nations Millennium Project Report (the “Sachs Report”) and the Commission for Africa Report (the “Blair Report”)—envisage substantial increases in aid flows to poor countries, especially to countries in sub-Saharan Africa. The international community sees increases in aid, along with improvements in recipient policies and freer global trade, as necessary for global prosperity and poverty reduction.
India and China are two of the oldest and still extant civilizations. For Europeans, they were legendary seats of immense wealth and wisdom right up to the eighteenth century. Somewhere between the mid-eighteenth century and early nineteenth centuries, both of these countries became, in the European eyes, bywords for stagnant, archaic, and weak nations. For China, this happened between the adulation of Voltaire and the cooler judgment of Montesquieu; in India’s case, it was the contrast between Sir William Jones’s desire to learn things Indian and James Mill’s dismissal of Indian history as nothing but darkness.
Korea’s rapid growth since the early 1960s has indeed been a wonder. Over three decades until the mid-1990s, annual real income growth in Korea averaged over 8 percent. If a country grows by 8 percent each year, its national income will double every decade; if that growth trend continues for thirty years, national income will record a stunning tenfold increase. The small city-state economies of Hong Kong SAR and Singapore also enjoyed rapid growth comparable to Korea’s over the same period. But it was a much bigger accomplishment for a country of almost 50 million people to sustain such high growth for more than three decades.
The procyclicality of financial systems has received an increasing amount of attention from policy-makers, academics and international organizations in recent years. This heightened interest stems from a combination of the ongoing globalization of finance, the role of the financial sector in various emerging market crises in the late 1990s and the potential impact on financial sectors of the upcoming implementation of the Basel II Accord.
Financial globalization, or the increased integration of global financial markets, raises important, new challenges for central banks. What nominal anchor is appropriate for countries susceptible to shifts in capital flows? How to prevent financial crises, or deal with them decisively when they unfold in real time? And how to think about difficult choices when monetary and financial stability objectives are at odds with each other?
What will determine the success of the New Partnership for Africa’s Development (NEPAD)? Which policies and measures envisaged under NEPAD need to receive highest priority? Who should be responsible for which task? What can be done to overcome potential risks and to speed up the implementation of action plans? These underlying questions are the themes that reverberate throughout this volume.