1、The Effect of the Global Financial Crisison Transition EconomiesAnna ShostyaPublished online: 1 June 2014#International Atlantic Economic Society 2014Abstract Thisresearchoffersnew insightsintothe effectoftheGlobalFinancialCrisisof 20072009 on the countries that used to be part of the Soviet bloc by
2、 focusing on across-regional comparison. Twenty-eight countries are grouped according to differentcriteria and the corresponding vulnerability of each group is compared. The researchlinks the variability in the groups responses to the dependence on trade with theEuropean Union, the degree of the tra
3、nsition and economic freedom, and the sectoralcomposition of GDP. The research finds that what is considered to be an advantage fora transition economy during “normal” times high degree of economic freedom andtrade liberalization, financial system sophistication, and a well-developed service sector
4、became a disadvantage during the crisis.Keywords Transitioneconomies.Globalfinancialcrisis.Financialliberalization.Cross-regionalcomparisonJEL F30.G20.O57.F39IntroductionThis paper presents the results of an analysis of 28 transition economies duringthe Global Financial Crisis of 20072009. It sheds
5、new light on the effect of thecrisis on the countries of the former Soviet bloc. Liberalization of financialsystems at the end of the 1980s to the beginning of the 1990s and their subse-quent integration into global markets had opened up these economies to foreigncapital flows and thus stimulated th
6、eir financial development and economicgrowth. At the same time, however, financial liberalization and integration pro-moted greater dependency on exports and financial capital inflows making theseeconomies more vulnerable to external shocks. Subsequently, the WashingtonAtl Econ J (2014) 42:317332DOI
7、 10.1007/s11293-014-9418-2A. Shostya (*)Pace University, 252-B Titus Ave, Staten Island, New York, NY 10306, USAe-mail: ashostyapace.eduConsensus that stressed interest rate liberalization, trade liberalization, privatiza-tion, and deregulation of markets came under attack from within (Williamson199
8、7). Economists and politicians realized that “making markets work requiresmore than just low inflation”. It requires a policy framework that would promotecompetitive markets and at the same time regulate and supervise financial systems(Stiglitz 1998, p.11). These fundamental issues, neglected by the
9、 WashingtonConsensus, became a reality for many former socialist countries that had struggledto create a proper balance between sound government policies and adequatesupervisory and regulatory structure on the one hand and an “invisible hand” onthe other. As a result, liberalization of financial mar
10、kets and economic integrationexposed those countries to greater risks of “catching a virus” from the outside.The impacts of the East Asian crisis of 19971998, the Russian crisis of 1998,and the Global Financial Crisis of 20072009 on the transition economies hadrevealed their particular vulnerability
11、 to such external shocks.Various studies have investigated the propagation mechanisms of financialcrises in emerging markets and specifically in transition economies. Some ofthem indicate that a higher degree of financial openness tends to temper thecontractionary effect of financial crises and that
12、 the high reliance on internationalcapital flows does not necessarily increase financial fragility in transition econ-omies (Brezigar-Masten et al. 2010; Hartwell 2012). Most researchers, however,confirm that financial capital withdrawals, bank panics, and trade links are majortransmission mechanism
13、s of the crises in the countries of the former Soviet bloc(Chang and Velasco 1998;Calvo2006; Edwards 2008;Blotetal.2009).In addition, the literature indicates that transition economies, and more gen-erally speaking, emerging markets, are more vulnerable to financial crises thanthe advanced countries
14、 (Shelburne 2008; Reinhart and Rogoff 2009). HutchisonandIlan(2005), for example, have examined the impact of currency and bankingcrises on a large set of countries, including 24 emerging economies. They foundthat real output contracts on average about 8 % and the impact lasts for twoyears in those
15、countries, compared to a 2 % reduction in real output lasting forone year in advanced countries. DellAriccia et al. (2008) provide evidence thatthe effect of banking crises on emerging markets real output is about 50 %greater than on the output in advanced countries. Furceri and Zdzienicka (2011)inv
16、estigated the impact of financial crises on output for eleven European transi-tion economies. They found that the crises have a profound and long-lastingeffect on these economies, decreasing long-term output by about 17 %.The recent financial crisis of 20072009 has stimulated further economicresearc
17、h. Some economists have reviewedtransmissionmechanismsandpolicyresponses in transition economies (Berglf et al. 2009). Another strand ofresearch offered insights into the reasons behind the variability of the countriesresponses to the crisis. The European Bank for Reconstruction and Development(EBRD
18、) 2010 Report found that the export product structure played a key role,e.g. exporters of machinery were hit the hardest at the peak of the crisis, inwinter 20082009. This analysis was supported by Gevorkyan (2011)whosuggested that the magnitude of the effect of the crisis on the Commonwealthof Inde
19、pendent States (CIS) differed for net-exporting and net-importing coun-tries due to the differences in their exposure to external shocks.318 A. ShostyaMost of the studies, however, focus on the effect of the financial crisis on aselect number of the countries of the former Soviet bloc, thus presenti
20、ng a limitedregional analysis of the effects of the crisis. European Union members, Common-wealth of Independent States (CIS) members,1Central and Eastern Europe (CEE)members,2and the Baltic region are the typical subjects. None of the studies seemto offer a detailed comparative analysis of the effe
21、ct of the crisis on separategroups of the countries, according to their sovereignty prior to transition, geo-graphic location, former USSR membership, European Union (EU) membership,and timing of the transition reforms. In addition, the existing body of knowledgeseems to overlook some important fact
22、ors that may put a transition economy at agreater risk during a financial crisis. This research will help fill the gap existing inthe economic literature. It offers a novel approach by focusing on cross-regionalcomparisons. Twenty-eight countries of the former Soviet bloc are grouped ac-cording to d
23、ifferent criteria (European Union membership, former Soviet Unionmembership, sovereignty prior to transition, timing of the financial reforms,geography, etc.) and the corresponding vulnerability of each group is compared.The research links the variability in the groups responses to the European Unio
24、nmembership, the degree of the transition and economic freedom, and the sectoralcomposition of GDP on the onset of the crisis.The rest of the paper proceeds as follows. The next section provides the methodol-ogy of dividing twenty-eight countries into twelve non-mutually exclusive groupsbased on six
25、 criteria. This follows by a discussion of the dependent and independentvariables and the model.We estimate two linearregressionequations tosee the effect ofthe extent of transition, degree of freedom, number of years under planned socialism,and other factors thathavenot beenyet beenlinkedto the cou
26、ntries performance duringthe crisis. The subsequent section details the effect of the Global Financial Crisis on thetwelve groups and discusses empirical results. The paper concludes with a sectiondiscussing a trade-off between costs and benefits of financial liberalization and eco-nomic freedom. Th
27、e authors hope to set a new direction to research on the effect of therecent financial crisis on transition economies.Methodology and DataGroup ClassificationAlthough the term “transition economy” usually refers to the countries of Central andEastern Europe and the former Soviet Union, there are cou
28、ntries outside of this regionthat have been shifting from a socialist-type economy toward a free market economy aswell. In 20002002 the IMF listed thirty-three countries as transition economies,including among the traditionally defined transition economies such countries as Cam-bodia,China,India,Lao
29、s,andVietnam(IMFbriefs2000;2001;2002).TheIMFrevised1CIS includes twelve out of fifteen former Soviet Union Republics Armenia, Azerbaijan, Belarus, Georgia,Kazakhstan, Kyrgyzstan, Moldova, Russian Federation, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan all but the Baltics (Estonia, Latvia, Lith
30、uania).2CEE includes all the Eastern European countries west of post-WWII border with the former Soviet Union,countries of the former Yugoslavia, and the three Baltic states.The Effect of the Global Financial Crisis on Transition Economies 319the list of the transition economies later, when ten coun
31、tries had joined the EuropeanUnion (8 in 2004 and 2 in 2007) and thus were considered to have officially completedthe transition process (IMF 2007).This study focuses on twenty-eight countries of the former Soviet bloc that encompassthecountriesoftheCentralEuropeandfifteenformerSovietUnionmembers.Th
32、ecountriesare divided into non-mutually exclusive groups according to the following six criteria:2. Sovereigns4(5 countries)Albania, Bulgaria, Hungary, Poland, and Romania;3. Baltic Region (3 countries)Estonia, Latvia, Lithuania;4. Central Eastern Europe minus Baltic Region (CEE-Baltic) (13 countrie
33、s)Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Former Yugo-slav Republic of Macedonia, Hungary, Montenegro, Poland, Romania, Serbia,Slovak Republic, Slovenia.5. Central Asia (5 countries)Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan,Uzbekistan;6. Caucasus (3 countries)Armenia,
34、Azerbaijan, Georgia;7. Eastern Commonwealth of Independent States (ECIS)5(4 countries)Belarus,Republic of Moldova, Russian Federation, Ukraine;8. European Union members (EU) (10 countries)Czech Republic, Estonia,Hungary, Latvia, Lithuania, Slovak Republic, Slovenia, Poland, Bulgaria andRomania;9. Ea
35、rly Reformers6(8 countries)Bulgaria, Croatia, Czech Republic, Hungary,Poland, Serbia, Slovak Republic, Slovenia;10. Laggards7(11 countries)Estonia, Former Yugoslav Republic of Macedonia,Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova, Montenegro, Romania,Russian Federation, Uzbekistan;11. Late Re
36、formers8(9 countries)Albania, Armenia, Azerbaijan, Belarus, Bosnia-Herzegovina; Georgia, Tajikistan, Turkmenistan, Ukraine;3Stock market inception was used as a proxy for the starting date.4These are the countries that were independent prior to the transition.5Eastern Commonwealth of Independent Sta
37、tes excludes Commonwealth of Independent States of CentralAsia and Caucasus.6Financial reforms started during 1989 1992.7Financial reforms started during 19931996.8Financial reforms started after 1998.320 A. Shostya12. Rich Resources (4 countries)Azerbaijan, Russia, Kazakhstan, andTurkmenistan.Table
38、 1 lists all countries in each group and shows the extent of overlap from onecategory to another.DataThe data on real GDP and transition indicators for twenty-eight transitioneconomies were obtained from EBRD Reports (1996, 20062011; 2009). Thetransition indicators were developed by the EBRD in the
39、1994 Transition Reportto quantify the country-specific progress in transition. The scores are reportedeach year as part of the Transition Report and they has been redefined andamended since the original report. They are measured on a scale from 1 to 4,where 1 represents little or no progress in refo
40、rm and 4 means that a country hadmade major advances in transition in a particular aspect. The 2005 and 2006scores were based on the progress achieved in the following areas: large-scaleprivatization, small-scale privatization, governance and enterprise restructuring,price liberalization, trade and
41、foreign exchange system, competition policy,banking reform and interest rate liberalization, securities markets and non-bankfinancial institutions, and infrastructure.The Freedom Index data came from the Wall Street Journal and the HeritageFoundation that have tracked economic freedom in 183 countri
42、es since 2000http:/www.heritage.org/index. The index ranges from 0 to 100, where 100represents the maximum freedom. The ten component scores are then averagedto give an overall economic freedom score for each country. The data on the sizeof agricultural and service sectors were obtained from the Wor
43、ld Bank (2006). Thenumber of years under the communist regime and the resource abundance datacame from De Melo et al. (1997) (in Bljer and Skreb (Eds.) 2006).Dependent VariableThe model uses an output gap to evaluate the effect of the financial crisis ontwenty-eight transition economies. We use a no
44、rmalized real GDP index, with2006 as the base year, for comparative purposes. The year 2006 is chosen as abase year to avoid any possibility of the early shock wave in 2007 for thecountries that had closer financial and trade links with the United States, thecountry of the crisis origin. The GDP in
45、2009 is chosen because it was the year ofthe greatest impact of the crisis. So, the value of the output gap (dependentvariable nGDP09-06) is measured by the difference between normalized realGDP index in 2009 and normalized real GDP index in 2006 (2006 GDP isconverted to 100). GDP statistics are obt
46、ained from EBRD economic statisticsand forecasts online database (http:/www.ebrd.org). A lower value of real GDP in2006, compared to the real GDP in 2009, means that the difference, i. e. the outputgap, takes on a negative value. If the countrys real GDP in 2006 exceeded the2009realGDPin2006,thenthe
47、differencetakesonapositivevalue,reflectingabetter response to the crisis. Thus, a higher value of nGDP09-06 is associated withThe Effect of the Global Financial Crisis on Transition Economies 321Table1Classificationoftransitioneconomiesinto12groupsCountryFSU (1)Sovereign(2)Baltic (3)CEE-Baltic(4)Cen
48、tralAsia(5)Caucasus(6)ECIS (7)EU (8)EarlyRefrs(9)Laggards (10)LateRefrs(11)RichResources(12)Albaniauni2713uni2713uni2713Armeniauni2713uni2713uni2713Azerbaijanuni2713uni2713uni2713uni2713Belarusuni2713uni2713uni2713Bosnia-Herzegovinauni2713uni2713Bulgariauni2713uni2713uni2713uni2713Croatiauni2713uni2
49、713CzechRepublicuni2713uni2713uni2713Estoniauni2713uni2713uni2713uni2713FormerYugoslavRepublicofMacedoniauni2713uni2713Georgiauni2713uni2713uni2713Hungaryuni2713uni2713uni2713uni2713Kazakhstanuni2713uni2713uni2713uni2713KyrgyzRepublicuni2713uni2713uni2713Latviauni2713uni2713uni2713uni2713Lithuaniauni2713uni2713uni2713uni2713Moldovauni2713uni2713uni2713Montenegrouni2713uni2713Polanduni2713uni2713uni2713uni2713Romaniauni2713uni2713uni2713uni2713322 A. ShostyaTable1(continued)CountryFSU (1)Sovereign(2)Baltic (3)CEE-Baltic(4)CentralAsia(5)Caucasus(6)ECIS (7
