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Transformation Slowdown; Openness of the Transition Economies

The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague. Transformation Slowdown; Openness of the Transition Economies. Jaromír Šindel ECES.

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Transformation Slowdown; Openness of the Transition Economies

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  1. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Transformation Slowdown; Openness of the Transition Economies Jaromír Šindel ECES

  2. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Topics • Transformation Slowdown • Flexibility, important for competitiveness and foreign investors, ... • Openness of the Transition Economies and its Implications on Political Economy in C&EE • Qualified labour force, inovation process, …

  3. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague The Evolution of GDP(value in the year before transition = 1.00, year 0 means the year of trasformation beginning) Transformation Slowdown Note: P – Poland, C – Czech R., S – Slovakia, H – Hungary, B - Bulgaria Source: Blanchard, O.: The Economics of Post-Communist Transition

  4. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Transformation Slowdown • Transformation economic slump • Expected • In every Transition country • But surprising with its magnitude and persistence

  5. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Transformation Slowdown – suprising persistence Change in GDP (2000 against 1990) Source: McMaster - Transition and Transformation in Central and Eastern Europe.

  6. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Initial Conditions • Main Problems • obsolete production structures and industries; • poor productivity and economic management; • „null“ unemployment, over employment; • low levels of technical infrastructure, anddependence on CEE and Soviet markets.

  7. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Reasons of Transformation Slowdown • Demand side • Consumption – real wages decline (wage cushion with exchange rate cushion – important transition tools); increased savings by expectation of price liberalization with exchange rate devaluation and by uncertainty about future development. • Investment – expectation lead to savings; obscure ownership delayed investment programme; restructuralization didn’t start. • Government expenditures – changes in government; declined role of government in economy. • Export – foreign demand – brake up of CMEA; search of new markets. • Supply side shocks • Price increase of imported goods – devaluation of currency; oil contract cancellation; • Price liberalization brought higher than expected supply shock • Government subsidy cancellation (rough budgetary limitations) • Managerial shock – new market environment

  8. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Openness of the Transition Economies • At the beginning of transformation process • Export – foreign demand – brake up of CMEA; search of new markets Trade between Central European countries and between CE countries and the former Soviet Union(% change in dollar terms) Source: Blanchard, O.: The Economics of Post-Communist Transition

  9. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Openness of the Transition Economies High Openness of C&EE Countries(exports and imports of goods and services as a % of GDP)

  10. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Openness of the Transition Economies Openness of Czech Republic (% of GDP, from 1996 to expected ratio in 2008Countries) Source: Ministry of Finance CR, 2005.

  11. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague The Openness and the Economic Policy • the higher or contrary impact of economic policy tools • macroeconomics view • fiscal policy, monetary policy, higher income propensity to import, different impact of exchange rate policy • microeconomics view • tax policy (competition – foreign investors; trade effect – intra-company trade) • sectoral view • preferences to the level and exchange rate regime

  12. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Development of the Czech Crown Exchange rate Development Source: Holub, T.: Foreign Exchange Interventions Under Inflation Targeting: The Czech Experience. ČNB (2004).

  13. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Lessons for future. • Make a project for gradual vs. rapid deetatization for Cuba and Russia. • Goals, solutions, reasons.

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