Geography of the Financial Crisis and Policy Response , Warsaw, 21-22 September

1. The 2008/2009 Crisis in Central and Eastern Europe- a general perspectiveGrzegorz GorzelakEUROREG Geography of the Financial Crisis and Policy Response, Warsaw, 21-22 September

2. The post-1989 transformation and the 2008 crisis….

3. Cautious comments and generalizations on transformation • The earlier and the deeper the initial decline, the higher the rate of growth could be achieved during the growth stage, and the sooner this stage would occur. The shock therapy paid back. • Only a few countries have enjoyed a stable, positive growth, and several of them suffered periods of stagnation if not decline. • Waves of successes followed waves of institutional reforms – slowdowns of reforms bounced back with recessions or slowdowns of growth.

4. The crisis – a general picture • Latvija -17.0 • Ukraine -15.0 • Estonia -12.3 • Lithuania -10.0 • Russia -7.9 • Romania -7.0 • Hungary -6.7 • Slovakia -5.0 • Czech Rep. -4.3 • Belarus -4.3 • Slovenia -4.0 • Bulgaria -1.4 • Poland 1.0

5. Real economy • Decline of GDP from tragic levels to just a slowdown. • Decline of capital formation deeper than of consumption. • The greatest losses in construction (housing). • Unemployment on „civilized” levels – from 6/7 to 14 per cent. • General increase of deficit in public finances. • External anti-crisis measures of some help, though may be a „borrowed demand”.

6. Causes: general hypotheses • Importing the global crisis: • dependence on shrinking exports, • decrease of FDI, • problems of foreign banks, • withdrawal of speculative capital. • Internal causes: • industrial specialization, • credit bubble, often denominated in foreign currencies, • growth of wages faster than productivity, • national currency overvalued, • unbalanced public finances, • inefficient institutional system

7. Exports dependence (?) Latvija -17.0 28 wood, machinery, metals, textiles, foodstuffs Ukraine -15.0 37 metals, fuel, chemicals, machinery transport, food Estonia -12.3 55 machinery, wood, paper, metals, food Lithuania -10.0 49 mineral, textiles, clothing, machinery, wood Russia -7.9 28 raw materials, arms Romania -7.0 25 machinery, apparel, metals, minerals, fuels, chemicals, Hungary -6.7 69 machinery and equipment, manufactures Slovakia -5.0 76 vehicles, machinery, electrical, metals, chemicals, plastics Czech R. -4.3 67 machinery and transport equipment Belarus -4.3 55 machinery, metals, food Slovenia -4.0 55 manufactures, machinery, vehicles, chemicals, food Bulgaria -1.4 43 apparel, iron and steel, machinery, fuels Poland +1.0 33 machinery, vehicles, manufactures, food No direct and simple relationships

8. Romania Poland Poland Hungary Hungary Depreciation – an anti-crisis measure (?)

9. Czech Rep. Bulgaria Bulgaria Czech Rep. Temporary depereciation – no effect

10. Lithuania Estonia Lithuania Latvia Stabilization: no effect as well

11. Slovakia Appreciation – and Euro – deepening the crisis Depreciation seems to help. Entering the Euro with too strong currency – dangerous.

12. Other external causes • Deutche Bank: „CEEC took a strong hit due to the high integration into EU on the trade side…”: Slovakia, Hungary, The Czech Rep., Slovenia • „….and in the banking sector”: Estonia, Latvia and Lithuania

13. And domestic… • Irresponsible internal policies, overspending in the public sector: Hungary. • Credit bubble, mostly in housing, denominated in foreign currencies: Estonia, Latvia, Lithuania, Romania, also Poland. • Growth of wages much faster than productivity: Estonia, Latvia. • Weak institutions: Bulgaria, also Poland

14. An attempt of synthesis External causes

15. Conclusions: (obvious) negative factors • The lethal combination: foreign ownership of banks, wage growth faster than productivity, overvalued currency and credit/housing bubble. • Also dangerous: high specialization in exports on sensitive markets of not highly innovative products. • Aggravating: pre-crisis imbalance of public finance.

16. Conclusions: positive (paradoxical) factors • Weak institutions seem to shelter from external impulses („The Economist”: „Countries that have a culture of prudence are more likely to adopt rules. So are countries that have had fiscal crises.” • Relative backwardness seems to be a positive factor when (too) modern instruments fail.

17. Positive effects of the crisis • EU funds increase domestic demand (Poland, Czech Rep.) – but „a lot of the EU dividend is already consumed.” • Andrus Ansip, the Estonian prime minister: „The crisis is even good if it makes the state more efficient”. • „Cleansing” effect: healthy will beocme torneg, soikc will be eliminated (if the governments do bnot prolong their agony) • And the crisis may have an educational influence in more general, social terms – the attachment to the „sheltering state” may finally vanish, or at least weaken.

18. Challenges for the future „When racing – remember that the speed with which you enter the curve is not important: the speed that you have when you get out of the curve matters!” Sobiesław Zasada, Polish famous rally driverin the 1960s and 1970s. • More complex growth strategies needed in the CEEC. • Greater efforts in innovations needed: the post-crisis world will be more innovation driven. • Can we - Europe as a whole, and Central- Eastern Europe in particular - meet these challenges? • If yes – how the policies should be changed?