Why Have Some CESEE Countries Done Better

Than Others since Early Transition?

IMF Macroeconomic Policy Seminar

Vienna, February 27, 2018

Bas B. Bakker

Senior Regional Resident Representative

for Central, Eastern and Southeastern Europe

In 1989, CESEE countries were much

poorer than Western Europe

2Note: For BIH data for 1990.

Then communism was abolished

What would we have expect to have

happened?

Income differentials with Western Europe

would become smaller

Poorer countries would grow faster than

richer countries

3

Convergence between 1989 and 2017

4

What happened in practice?

After initial decline in GDP in early transition, countries started growing again in early to late 1990s

Since then there has been clear convergence with Western Europe

But some countries have done much better than others

Some countries are still poorer than they were in 1989

5

After a deep post-transition recession

6Note: For BIH data for 1990-1996

Most countries have grown strongly over

the past two decades

7

In the past two decades all countries have

narrowed income differentials with Germany

8

ALB

AUT

BEL

BGR

BIH

BLR

CYP

CZEDEU

DNKESP

EST

FINFRA

GBR

GRC

HRV

HUN

ITA

LTU

LUX

LVA

MDA

MKDMLT

MNE

NLD

POL

PRT

ROU

RUS

SRB

SVK

SVNSWEUKR

0

50

100

150

200

250

0 5 10 15 20 25 30 35 40 45

EU New Member States have done better than

Western Balkans and CIS

9

GDP PPP per capita in 1996 vs. its change in 1996-2017

Note: Data for UVK not available.

Source: Penn World Tables and WEO.

GD

P p

er

cap

ita g

row

th in

1996

-2017

(Perc

en

t)

GDP PPP per capita in 1996

(thousands of 2011 USD)

New Member States

Western Balkans

European CIS

Some parts of CESEE have similar income levels

to Spain and Italy; others are still poorer

10

Most-but not all-countries are richer now

than in 1989

11

What explains these differences?

12

1. Is it data issues?

2. Early transition

3. War and conflicts

4. Boom-busts / macro-stability

5. EU Membership

6. Whether transition has been completed

7. Institutions

8. Country case (a) Poland vs. Ukraine

9. Country case (b) Belarus

1. Do differences reflect data issues?

GDP statistics in late 1989 not very good

Prices were not right

Other problem: GDP not good indicator of

consumer welfare

Much of what was produced was not

wanted by consumers (cf. military

expenditures)

Much was of low quality

13

50

60

70

80

90

100

110

1990 1992 1994 1996

However, even if size of initial collapse was

exaggerated, there clearly were large cross country

differences

14

Other more easily measurable

indicators also suggest:

Large initial output falls

Large cross country

differences

Between 1990 and 1995,

electricity consumption fell

by almost 40 percent in

Moldova and Ukraine

very little in Poland.

Electricity Consumption per Capita

(index, 1990=100)

POL

BGR

MDA

RUS

UKR

Both progress and cross-country differences can be

seen in satellite pictures

15

2. Early transition to market economy

In early 1990s there was a debate whether reforms should be gradual

Worry was that more rapid reforms would be too painful

Rapid reforms were indeed painful—unemployment in early reformers rose sharply

However, countries that postponed reforms had a much longer and deeper initial recession

Why? Without hard budget constraint on firms, it was hard to get credit growth and inflation under control

16

ALBBLR

BIH

BGR

HRV

CZE

EST

HUN

LVALTU

MKD

MDA

POL

ROU RUS

SRB & MNE

SVK

SVN

UKR

-70

-60

-50

-40

-30

-20

-10

0

1 2 3 4

Note: t=1989

For former USSSR countries: t=1991

For Bosnia and Herzegovina: t=1990

EBRD transition indicator for SRB & MNE – data only for Serbia

Countries that postponed reforms

suffered deeper output losses

17

23 71 12 22 88 26

Cumulative change of GDP and early transition reforms

Average of six EBRD transition indicators in 1995

Cu

mu

lati

ve c

han

ge o

f G

DP

in t

he b

eg

inn

ing

of

tran

siti

on

, t;

t+5 (

perc

en

t)

ALB

BLR

BIH

BGR

HRV

CZE

EST

HUN

LVA

LTU

MKDMDA

POL

ROU

RUS

SRB & MNE

SVK

SVN

UKR

0

5

10

15

20

25

30

-30 -25 -20 -15 -10 -5 0

Weaker growth in early transition not

compensated by faster growth later

18

Ch

an

ge

inin

com

ep

er

cap

ita g

ap

to

USA

,

1998-1

7 (

pp

)

Convergence per capita to USA in 1989-97 and 1998-17 (pp)

Change in income per capita gap to USA, 1989-97 (pp)

Note: 1990-17 for Bosnia and Herzegovina

ALB

BLR

BIH

BGR

HRV

CZE

EST

HUN

LVALTU

MKD

MDA

POL

ROU

RUS

SRB & MNE

SVK

SVN

UKR

-2

-1

0

1

2

3

4

0 5 10 15 20 25

3. Wars and conflicts: the four countries

with the lowest growth all had wars

19

Avera

ge a

nn

ual G

DP

per

cap

ita g

row

th,

1989-2

017

(perc

en

t)

Average GDP per capita growth, 1989-17, and its level in 1989

Red circle indicate whether a country experienced a war in 1989-17

Note: 1999-2017 for BIH.

GDP per capita in 1989, thousands of 2016 PPP US dollars

100

110

120

130

140

150

160

170

180

190

2000 2002 2004 2006 2008 2010 2012 2014 2016

-16

-12

-8

-4

0

4

8

12

2000 2002 2004 2006 2008 2010 2012 2014 2016

4. Some countries have gone through

boom-busts that slowed average growth

20

Ukraine

Poland

GDP Growth

(Percent)

GDP per capita

(2000=100)

Ukraine

Poland

Countries with fewer recessions grew

faster on average

21

ALB

BLR

BGR

HRV

CZE

EST

HUN

UVK

LVALTU

MKDMDAMNE

POL

ROU

RUS

SRB

SVK

SVN

UKR

0

1

2

3

4

5

0 1 2 3 4 5 6 7 8 9

Number of years with a decline of GDP vs. annual average GDP growth

between 1996 and 2017

Number of years with negative GDP growth, 1996-2017

Ave

rag

e a

nn

ual G

DP

gro

wth

, 1996-2

017

(Perc

en

t)

Note: for MNE and UVK: data for 2001-17; for SRB: 1998-2017.

ALB

BLR

BIH

BGR

HRV

CZE

EST

HUN

UVK

LVA

LTU

MKD

MDA

MNE

POL

ROURUS

SRBSVK

SVN

UKR

-16

-12

-8

-4

0

4

3 4 5 6 7 8 9 10

Countries which grew very fast pre-crisis

experienced the deepest decline in 2009

22Average annual GDP growth, 2002-07

(Percent)

GD

P g

row

th in

2009

(Perc

en

t)

Average annual GDP growth in 2002-07

vs.

GDP growth in 2009

0

5

10

15

20

25

30

35

EST BGR SVK ROU CZE POL BIH HUN BLR RUS UKR SVN HRV UVK MKD ALB MDA

Crises led to high NPLs and weak banks,

which holds back growth

23

NPL ratio in 2008 and peak value between 2008-16

(Percent)

Note: for BLR, UVK and ALB: bar showing data for 2010; for MDA: 2009.

Max. between

2008-16

2008

2.0

2.5

3.0

3.5

4.0

BLR BIH SRB MDA UKR RUS ALB MKD SVN ROU BGR HRV CZE HUN SVK LVA LTU POL EST

5. EU Membership

EU accession was powerful catalyst for reforms and

upgrading of institutional framework

24

Average of six EBRD indicators in 2014

24Note: 2007 for Czech Republic

EU countries

non-EU countries

0

10

20

30

1 2 3 4 5

0

10

20

30

1 2 3 4 5

(Prospects of) EU Membership led to

more reforms and higher growth

25

GD

P p

er

cap

ita in

1995 a

nd

2014,

tho

usa

nd

s o

f 2014 P

PP

US d

ollars

Average of the EBRD transition indicators in 1995 and 2014

SEE non-EUCIS

SEE EU

CE5

Baltics

19952014

GDP per capita and average of EBRD transition indicators

ALB

BIH

HRV

MKD

SRB & MNE

1

2

3

4

5

5 10 15 20

BGR

CZE

EST

HUN

LVA

LTU

POL

ROUSVK

SVN

1

2

3

4

5

6

10 15 20 25

Rapid convergence in EU and EU

candidate countries

26

Ave

rag

e a

nn

ual G

DP

per

cap

ita g

row

th,

2000-1

7 (

perc

en

t)

Average GDP per capita growth, 2000-17, and its level in 2000

CESEE-EU countries (as of 2007) Candidate countries and Croatia

Note: Bosnia and Herzegovina has been recognized as

a potential candidate country by the EU

GDP per capita in 2000, thousands of 2016 PPP US dollars

BLR

MDA

RUS

UKR

-2

-1

0

1

2

3

5 10 15 20 25

By contrast, no convergence in European

CIS

27

Avera

ge a

nn

ual G

DP

per

cap

ita g

row

th,

1989-1

7(p

erc

en

t)

Average GDP per capita growth, 1989-17, and its level in 1989

GDP per capita in 1989, thousands of 2016 PPP US dollars

ALBBIH

BGRHRV

CZE

ESTHUN

LVA

LTU

MKD

MDA

POL

ROU

RUS

SRB & MNE

SVKSVN

UKR

0

10

20

30

40

50

60

70

3 3.5 4 4.5

6. Countries that have more completed

transition are richer…

28Average of six EBRD transition indicators , 2014

GD

P p

er

cap

ita a

s p

erc

en

t o

f U

S, 2017

GDP per capita as percent of US in 2017 and average of EBRD transition indicators in 2014

Note: EBRD data for CZE from 2007

and for SRB & MNE – only for Serbia

…as do countries where private sector is

more vibrant

29

GDP PPP per capita in 2017 and private sector share in GDP in 2010

GD

P P

PP

per

cap

ita a

s p

erc

en

t o

f U

S, 2017

Private sector share in GDP in 2010

(Percent)

ALBBIH

BGR

HRV

EST

HUNLVA

LTU

MKD

MDA

POL

ROU

RUS

SRB

SVKSVN

UKR

MNE

0

10

20

30

40

50

60

70

55 60 65 70 75 80 85

7. CESEE countries differ in the quality of

institutions, e.g. in governance….

30

Worldwide Governance Indicators, 2016

(Ranges from -2.5 (weak) to 2.5 (strong) governance performance)

…and the judiciary.

31

Judicial Independence, 2015

Source: World Economic Forum. Note: Worldwide distribution excluding LICs

Above 75 percentile Between 25 and 75 percentile Below 25 percentile

Impartial Courts, 2015

Richer countries have better institutions

(though causality may go both ways)

32

GD

P p

er

cap

ita in

2016

(Th

ou

san

ds

of

PP

P d

ollars

)

Government Effectiveness (WGI), 2016

Ranges from approximately -2.5 (weak) to 2.5 (strong) governance performance

ALB

AUT

BEL

BGR

BIH

BLR

CZE

DEUDNK

ESP

EST

FINFRA

GBR

GRC

HRV

HUN

ISL

ITA

LTU

LVA

UVK

MDA

MKD

MLT

MNE

NLD

POLPRT

ROM

RUS

SVKSVN

SWE

UKR

SRB

0

10

20

30

40

50

60

-1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5

Government Effectiveness vs. Income Per Capita, 2016

COUNTRY CASES

33

8. Country case (a) Poland vs Ukraine

Poland has done much better than Ukraine

In 1989 they were equally rich

Now Poland is three times as rich

Why?

Poland more macro-stability

Poland reformed more and earlier

Poland has better institutions

34

Difference is clearly visible on satellite

pictures.

35

Nightlights intensity

0

200

400

600

800

1000

1200

1989 1993 1997 2001 2005 2009 2013 2017

POL UKR

Macro-stabilization occurred much

earlier in Poland.

36

CPI Inflation

(Percent y/y)

Poland

0

2

4

6

8

10

12

14

16

18

1989 1991 1993 1995 1997 1999

GDP Per Capita

(Thousands of 2016 US$)

Poland

Ukraine

Ukraine

10155↑

Poland has not had any crisis; Ukraine

has had three

37

80

100

120

140

160

180

200

220

1997 2001 2005 2009 2013 2017

GDP Level

(Index, 1997=100)

-10

0

10

20

30

40

50

60

1995 1999 2003 2007 2011 2015

PLN UAH

Exchange Rates vs EUR

(Percent m/m)

Poland

Ukraine

Russian

crisisGFC

Ukrainian

crisis

Russian

crisis GFCUkrainian

crisis

Poland reformed earlier and deeper

38

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Max

Poland

Ukraine

Average of EBRD Transition Indicators

Poland has much better institutions

39

Worldwide Governance Indicators, 2016

(CESEE countries in global ranking)

Voice and

Accountability

Political

Stability

Government

Effectiveness

Regulatory

Quality

Rule of

Law

Control of

Corruption

Poland

Ukraine

Bett

er

inst

itu

tio

ns

BELARUS

40

9. Country case (b) Belarus

Belarus is another interesting example

Reformed much less than EU New Member

States

It grew quite rapidly between 1995 and 2010

But in recent years economic growth has been

well below other CESEE countries

What explains this?

41

Belarus has reversed liberalizing reforms and

restructuring has barely moved forward

42

1.0

2.0

3.0

4.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Governance and

Enterprise

Restructuring

Max

Price Liberalization

Trade and Forex

System

Competition Policy

Large Scale

PrivatizationSmall Scale

Privatization

EBRD Transition Indicators for Belarus

Three phases in Belarus macro

performance since independence:

43

-15

-10

-5

0

5

10

15

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Real GDP Growth in Belarus

(Percent)Po

st-i

nd

ep

en

den

ce

con

tract

ion

Boom years Slow growth

and recession

Why has economic performance

deteriorated?

Is it due to external reasons (including

recession in Russia and Ukraine)?

Or were there also internal reasons? Was the

growth model unsustainable?

44

-8

-6

-4

-2

0

2

4

6

8

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

External factors have certainly played a role in the

slowdown: Belarus export markets have done poorly

45

Export market growth

(Percent, y/y)

Note: export market growth is weighted average of Belarus’ trading partners real GDP growth, covering over 95 percent of

exports.

5-year moving average

Internal factor: Belarus growth model was

unsustainable

Growth was increasingly driven by

unsustainable investment / domestic demand

boom

This led to BOP crises

Productivity (TFP) declined, offsetting the

impact of the larger capital stock

46

15

20

25

30

35

40

1995 2000 2005 2010

Macro-situation during boom was not sustainable.

Investment boom led to large CA deficit

47

-15

-10

-5

0

5

1995 2000 2005 2010

Investment and Saving Rates

(Percent of GDP)

Current Account Balance

(Percent of GDP)

Investment

Saving

And micro-incentives were distorted

Growth rates masked stagnating productivity

Investment led to declining returns

Capital use was also inefficient

In many instances it kept unviable SOEs alive, rather than productively supporting new companies

48

Adding capital has run into diminishing

returns

49

1990

2014

10

15

20

25

30

35

40

20 30 40 50 60 70 80Real capital per worker

(Thousands of 2011 USD)

Real G

DP

per

wo

rker

(Th

ou

san

ds

of

2011 U

SD

)

Real Capital per Worker vs. Real GDP per Worker in Belarus

1970

1989

15

20

25

30

20 25 30 35 40 45 50 55

Belarus is running into same constraints as Poland in 1980s

Between late 1970s and late 1980s, capital per worker increased by

almost half

But GDP per worker barely increased

50Real capital per worker

(Thousands of 2011 USD)

Real G

DP

per

wo

rker

(Th

ou

san

ds

of

2011 U

SD

)

Poland

Lack of proper incentives, including in SOEs,

hampers efficient use of resources

To get a more efficient use of resources, the restructuring of

loss making SOEs is necessary, as well as a level playing field

for the creation of dynamic new private sector companies

51

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Share of loss-making companies in total companies surveyed

(Percent)

CONCLUSION

52

Why have some countries done better

than others?

Part of it is good luck

No wars

EU membership (due to geographical location)

But policies also played a role

53

Good policies help

Good macro-policies

Macro-instability hurts growth

Good micro-policies

Good working markets help boost

productivity/efficient allocation of resources

Good institutions

Strengthens incentives to invest, innovate, and

not emigrate

54

Thank you