Why transition economies did worse than others in 2008-09 recession?

Popov, Vladimir (2011): Why transition economies did worse than others in 2008-09 recession?

Abstract

While developing countries as a group did better than developed countries in 2008-09 recession, transition economies – former communist countries – experienced the largest reduction of output. Out of 42 countries that experienced negative growth in 2007-09, 13 were transition economies. In fact, 4 out of 5 most affected economies were former communist countries (Latvia, Estonia, Ukraine, Lithuania). The hypothesis is that these transition countries (1) suffered more than the others from the sudden outflow of capital and (2) did not manage this outflow particularly well. The rule of thumb was that large outflows of capital, especially coupled with negative trade shocks, suppressed economic activity. But if the shocks were relatively small (up to 3% of GDP change in trade and capital account from Q2 2008 to an average of subsequent 3 quarters), it was possible to mitigate them through devaluation (not allowing foreign exchange reserves to drop by the same amount). If the shocks were large, even devaluation did not allow to avoid output fall.

• Item Type: MPRA Paper
• Language: English
• Keywords: Recession 2008-09, capital outflow, trade shocks, devaluation
• Subjects: F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F42 - International Policy Coordination and Transmission; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F40 - General; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies

References

World Economic Situation and Prospects, 2010. UN/DESA, 2010.

International Financial Statistics, IMF.

World Development Indicators, World Bank.

Popov, V., 2011. To devaluate or not to devalue? How East European countries responded to the outflow of capital in 1997-99 and in 2008-09. CEFIR and NES working paper #154. January 2011.