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Working Paper Summaries (WP/94/77 - WP/94/147)
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Summary of WP/94/157: “Financing the Transition of Previously Centrally Planned Economies: Macroeconomic Effects on Western Europe”

Author(s):
International Monetary Fund
Published Date:
February 1995
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This paper takes a new look at the macroeconomic implications of the financing of Previously Centrally Planned Economies’ (PCPEs’) transition, based on a multicountry macroeconomic model extended to include a very stylized PCPE block, and allowing for different assumptions on the sources and uses of the capital flows. Under alternative assumptions of the likely developments in external financing of PCPE transition, the study simulates the response of PCPEs to a transfer of capital from the industrial countries, and assesses the potential implications for Western Europe over the next ten years.

Western European capital markets are likely to experience only a mild squeeze from concerted efforts to provide external financing to PCPEs, and most macroeconomic aggregates are likely to suffer shocks significantly smaller than would be expected from a typical business cycle. The results of the simulation suggest that industrial countries could well afford a significant (perhaps 20-fold) increase in financial assistance to PCPEs, before the impact on their capital markets could induce effects of business-cycle magnitude on economic activity and consumption.

Several reasons underlie these conclusions. First, the flow of capital forthcoming from industrial countries to the economies in transition is likely to be modest compared to industrial countries’ saving and investment, even when the most generous estimates of likely flows are adjusted upwards toward estimates of needed flows. Second, projected outflows must be viewed from an intertemporal perspective, an approach that is more likely to capture other potentially beneficial effects that any flow of capital from the West to the East is likely to generate.

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