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Mr. James Roaf, Mr. Ruben V Atoyan, Mr. Bikas Joshi, and Mr. Krzysztof Krogulski

Abstract

In the mid-1980s, few would have imagined the dramatic changes that were about to engulf Central and Eastern Europe, notwithstanding the initial steps towards modernization introduced in the Soviet Union by the programs of glasnost (openness) and perestroika (restructuring). Nor would they have guessed the speed of these changes: by the end of 1991 the political landscape was unrecognizable from just three years earlier.

Mr. James Roaf, Mr. Ruben V Atoyan, Mr. Bikas Joshi, and Mr. Krzysztof Krogulski

Abstract

Most countries faced extreme difficulties during the first years of transition. Output fell dramatically across the board as trade links and internal economic relationships were broken. Inflation skyrocketed as price and foreign exchange controls were removed. The countries with better initial conditions and more aggressive approaches to reform reached stabilization faster. In several other countries, however, conflict or institutional obstacles to market reforms exacerbated the transition challenges.

Mr. James Roaf, Mr. Ruben V Atoyan, Mr. Bikas Joshi, and Mr. Krzysztof Krogulski

Abstract

After the fall of communism, monetary policy had to take on a more active role, requiring policy and institutional changes, including the establishment of independent central banks. A key choice was whether to use monetary aggregates or fixed exchange rates as the basis for the initial stabilization following price liberalization. Most countries later moved away from their initial choice of nominal anchor, eventually tending towards inflation targeting, hard exchange rate pegs, or euro adoption, with a diminishing number of intermediate regimes.

Mr. James Roaf, Mr. Ruben V Atoyan, Mr. Bikas Joshi, and Mr. Krzysztof Krogulski

Abstract

The mid-1990s saw continued rapid economic changes in the region, often amid considerable political uncertainty. For some countries, macro stabilization came earlier, and the main challenge was structural reform to improve the workings of the economy. For others, the task of developing market structures took much longer, and was carried out in a more difficult macro environment with inflation and fiscal deficits not yet firmly under control. This period saw considerable advances in both policies and economic outcomes in all transition countries, albeit with a lot of variance. Successful program implementation during these years proved to be a key determinant in sustaining economic growth and helping weather challenges in the years to come.

Mr. James Roaf, Mr. Ruben V Atoyan, Mr. Bikas Joshi, and Mr. Krzysztof Krogulski

Abstract

After incomplete reform that led to banking crises across the region in the 1990s, almost all countries adopted a model based on strong bank supervision and high participation in local banking sectors by Western European parent banks. This brought much needed know-how and access to foreign financing—but also contributed to the major credit boom in the 2000s, exacerbating the effects of the global financial crisis at the end of the decade. Current policy priorities include addressing crisis legacies of bad debts and slow credit growth, as well as adapting to the new regulatory environment in the euro zone.

Mr. James Roaf, Mr. Ruben V Atoyan, Mr. Bikas Joshi, and Mr. Krzysztof Krogulski

Abstract

The past 25 years have seen a dramatic transformation in Europe’s former communist countries, resulting in their reintegration with the global economy, and, in most cases, major improvements in living standards. But the task of building full market economies has been difficult and protracted. Liberalization of trade and prices came quickly, but institutional reforms—such as governance reform, competition policy, privatization and enterprise restructuring—often faced opposition from vested interests. The results of the first years of transition were uneven. All countries suffered high inflation and major recessions as prices were freed and old economic linkages broke down. But the scale of output losses and the time taken for growth to return and inflation to be brought under control varied widely. Initial conditions and external factors played a role, but policies were critical too. Countries that undertook more front-loaded and bold reforms were rewarded with faster recovery and income convergence. Others were more vulnerable to the crises that swept the region in the wake of the 1997 Asia crisis.

Mr. James Roaf, Mr. Ruben V Atoyan, Mr. Bikas Joshi, and Mr. Krzysztof Krogulski

Abstract

Starting from a common base of full but unproductive employment under communism, reform of labor market policies and institutions has varied widely across countries. While labor market outcomes also depend on factors well beyond the labor market itself, these policy differences are associated with very different results in terms of employment and unemployment. Institutional reforms to improve the working of the labor market, while protecting vulnerable groups, thus remain a key priority for many countries of the region.

Mr. James Roaf, Mr. Ruben V Atoyan, Mr. Bikas Joshi, and Mr. Krzysztof Krogulski

Abstract

The latter part of the 1990s was a period of major crises in emerging markets, from Mexico in 1994–95, through Asia in 1997, and leading to Argentina in 2001. The emerging European economies were highly vulnerable in this environment, with macroeconomic stability not fully secured, nascent market institutions, and fragile financial systems. And indeed many of the countries that had progressed less in establishing robust market-based frameworks succumbed, first in a number of individual crises, and then in the wake of the systematic case of Russia in 1998. However, these crises (several of which involved calls on the IMF for financial assistance) resulted in most countries learning from the experience, and exiting the period determined to follow policies that would reduce their exposure to such risk—laying the ground for the period of growth that followed.

Mr. James Roaf, Mr. Ruben V Atoyan, Mr. Bikas Joshi, and Mr. Krzysztof Krogulski

Abstract

Trade and investment links with Western Europe have been among the most important factors behind the growth of the past 25 years. Some countries have been able to exploit these opportunities much more effectively than others, due to location, initial conditions, and the policy environment. Looking forward, countries that have benefited less so far need to develop a more external orientation and a more conducive environment for foreign investment, while the more successful countries need to focus on building markets globally and advancing to higher value production.

Mr. James Roaf, Mr. Ruben V Atoyan, Mr. Bikas Joshi, and Mr. Krzysztof Krogulski

Abstract

The mid-2000s saw extremely rapid growth across the region, spurred by the benign global environment and ever-increasing confidence in the process of convergence with the EU. However, growth was driven largely by external borrowing for consumption and construction, and became increasingly unsustainable. Even for those countries that heeded the dangers, it was very difficult to devise policies that could push back against the tide of capital flowing into the region.