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This paper was written when the author was a Visiting Scholar in the Research Department and the Fiscal Affairs Department of the IMF. Mr. Grzegorz W. Kolodko—professor at Warsaw School of Economics and Visiting Professor at the University of Rochester and UCLA—was Poland’s Deputy Premier and Finance Minister in 1994-97. The views presented in this paper are the author’s alone and should not be taken as representative of the IMF or the Polish government, or any other organization the author may be associated with.
The EE countries comprise of Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Poland, FRY Macedonia, Romania, Slovakia, Slovenia, and Yugoslavia. The FSU countries comprise of Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.
There should be doubts about the reliability of data from this period. Even with certain errors, long-term analyses and comparisons between particular countries should be possible. However, the conclusions drawn from these analyses should be treated with caution, and they are in this paper.
In the extreme cases of both large economies, such as Russia, and small ones, such as Albania, it had happened that with an even larger private sector than in other countries (in terms of its contribution to GDP), as e.g., in Poland or Slovenia, the overall performance was much worse. Not the scope of liberalization or the range of the private sector were decisive in the changes of efficiency, but the institutional vacuum in the former countries and relatively sound arrangements and good policies in the latter.
Of course, the Russian case is quite different from the Polish case. In Russia, GDP fell by 8.8 percent already before substantial liberalization took place, i.e., in 1990-91. In Poland, there was growth until mid-1989, when the pace of liberalization was fundamentally accelerated, and only since then has output started to fall.
The opposite tendencies vis-à-vis recession and growth in China and Russia should be seen as the most striking event in the world economy in the last decade of 20th century. Whereas during this time GDP in China was doubled, in Russia it was halved. This also has significant geopolitical implications.
During the implementation of structural reforms and a development program “Strategy for Poland” (1994-97) there was a special task force led by the Deputy Premier and Minister of Finance, that worked on early warning and policy responses to counteract the threat of negative external shocks, especially vis-à-vis risks stemming from the liberalization of financial markets. This tiny team worked in very discreet manner, out of the media spotlight, what was crucial for its success.
Out of about $104 billion of inward FDI over the period 1989-99, about 55 percent was allocated to a group of five EE countries that were most advanced in both the transition and their accession negotiations with the EU, i.e., the Czech Republic, Estonia, Hungary, Poland and Slovenia. The largest of them, Poland, absorbed about 20 percent of this amount. As for total FDI placed in the EE region, these five countries received about 77 percent of foreign direct capital, while Poland alone received almost 30 percent. It is important to emphasize that in these cases the capital flow is actually a net inflow, because outward FDI virtually does not exist in these countries. That is, of course, if the capital flight from Russia is disregarded. If it is not, then the net flow of capital to the whole EE and FSU region over the first decade of transition is negative. It implies that more capital has left the region than was invested there—with all the harmful implications for recovery and growth.
For instance, it occurred in Poland in 1999, when GDP estimated in current dollars dropped by 2.1 percent, whereas in the real terms, when measured in terms of constant domestic currency, increased by 4.1 percent.
The issue of depreciation and appreciation will disappear from the policy agenda when certain countries join the EU and abandon their national currencies. It will be the easiest exercise in countries presently under a currency board regime, e.g., Estonia. In such case it will be done by converting from the D-mark (the denomination used under the currency board arrangements as anchor) to the euro. In the longer run, all new EU members from Eastern Europe will join the euro zone.
Of course, only the income, that is the flow. As for the standard of living, which is a function of both the flows and stocks of assets accumulated in the past, this group of countries would still be firmly below the level enjoyed by most advanced societies.
However, it is more rational to consider for the purpose of catching-up that GDP measured in terms of purchasing power parity. Therefore, in Hungary’s example, the respective values would be $57,000 and $35,000. There are certain methodological concerns about the relevance of the data used for the purpose of these comparisons. Always the evaluation of GDP based on purchasing power parity ought to be taken with caution, and even more so as a proxy for the transition economies. It must raise some doubts if the evaluation of GDP per capita (in 1995 PPP dollars) suggests that Estonia is on the par with the Czech Republic, or that Belarus’ income is almost twice as large as the Ukraine’s, or that Macedonia’s GDP per capita is almost 70 percent larger than Moldova’s. However, these estimations are made on the same methodological grounds and are done along the lines of similar assumptions. So if there is—and for sure there is—some error in these estimations, it still allows us to rely with proper reservations, on these data.