The Economies in Transition: The RecoveryProject LINK, New York 2011

Robert C. Shelburne Economic Commission for Europe

EiT growth was similar or above developing countries pre-crisis, but significantly below post-crisis. Downside risk: eurozone crisis

-8.000

-6.000

-4.000

-2.000

0.000

2.000

4.000

6.000

8.000

10.000

19992000

20012002

20032004

20052006

20072008

20092010

20112012f

2013f

Rea

l GD

P G

row

th P

PP B

asis

EiT Advanced Developing and Emerging

Real GDP Growth in Europe, 2000-2012

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Rea

l GD

P G

row

th R

ate

SEE-6 EECCA-11 Russia NMS-12 EU-15 (Old)

SEE Quarterly GDP Y-O-Y

-6

-4

-2

0

2

4

6

8

2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2

Albania fYR of Macedonia Serbia

CIS: Quarterly GDP Y-O-Y

-20-18-16-14-12-10-8-6-4-202468

10

2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2

Armenia Georgia Kazakhstan Russia Ukraine

Comparison of Severity of Crisis Using Time

Annual Average

2003-2007

Annual Average

2007-2011Total

2007-2011Years Lost

due to Crisis SEE-6 5.3 0.6 2.6 3.5 EECCA-11 9.5 3.1 12.8 2.67 Russia 7.6 1.3 5.2 3.33EiT (-T) 7.8 1.9 8 ~3 (2.9) NMS 5.8 1.3 5.4 ~3 (3.1)ECA (-T) 7.2 1.8 7.2 3

EU (15 Old) 2.5 -0.3 -1.1 5Emerging & Developing 8 5.6 24.5 ~1

GDP Growth

Level of GDP in 2011 Compared to 2007

The Great Recession: Bigger than 1998 currency crisis but insignificant compared to transition crisis

Russia- Crises Compared

50

75

100

125

150

175

200

225

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Years After Shock

Rea

l GD

P In

dex

Transition 1998 Currency Great Recession

Real GDP in 2011 Compared to 1989

0

50

100

150

200

250

300

Turkmen

istan

Turkey

Uzbek

istan

Azerbaij

anPolandBela

rusAlban

ia

Slovak Rep

ublicKazak

hstan

Slovenia

Czech

Republic

Armen

iaEsto

niaHungaryRoman

ia

Kyrgyz Republi

cBulgari

aLith

uania

Russia

The fYR of M

acedoniaCroati

aLatv

ia

Monten

egro BiH

Serbia

Tajikistan

Georgia

Ukraine

MoldovaR

eal G

DP

2011

vs

1989

Convergence in Wider-Europe2000-2011

1

1.5

2

2.5

3

3.5

4

4.5

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,000

Per Capita Income PPP 2000

Tota

l Gro

wth

200

0 to

201

1 SEE CIS ADV NMS

EECCA (CIS) & SEE Are Slowly Converging to Eurozone Per Capita Income

0

0.2

0.4

0.6

0.8

1

1.2

19981999

20002001

20022003

20042005

20062007

20082009

20102011

2012

Rela

tive

GDP

Per

Cap

ita P

PP

EECCA/Eurozone EECCA/World SEE/Euro Area 17 SEE/World

World

Eurozone

The EiT Account for 4.6% of World GDP, EiT+NMS+T=8.3%

1998

1998

1998

1998

1998

2011

2011

2011

2011

2011

0

0.5

1

1.5

2

2.5

3

3.5

Russia EECCA-11 SEE-6 NMS Turkey

Shar

e (%

) of W

orld

GD

P PP

P

Unemployment in the CIS

24

6

8

10

1214

16

18

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f 2014fArmenia Azerbaijan GeorgiaKazakhstan Kyrgyz Republic MoldovaRussia Ukraine

Unemployment in South-East Europe: Over 10% in All, Largely Structural

5

10

15

20

25

30

35

40

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f 2014f

Unem

ploy

men

t Rat

e

Albania Bosnia and HerzegovinaCroatia The former Yugoslav Republic of MacedoniaMontenegro Serbia

Unemployment in the NMSMonthly 20008-2011

0

5

10

15

20

25

2008

M01

2008

M03

2008

M05

2008

M07

2008

M09

2008

M11

2009

M01

2009

M03

2009

M05

2009

M07

2009

M09

2009

M11

2010

M01

2010

M03

2010

M05

2010

M07

2010

M09

2010

M11

2011

M01

2011

M03

2011

M05

2011

M07

Bulgaria Czech Republic Estonia Hungary LatviaLithuania Poland Romania Slovakia Slovenia

Baltics& Slovakia

Czech, Romania,Slovenia

Relationship between Change in GDP and Unemployment in ECE Economies, 2009 vs 2008

Inflation in SEE4 of 6 Fixed to Euro (solid), 2 flexible (mixed)

-2

0

2

4

6

8

10

12

14

16

2007

M0120

07M03

2007

M0520

07M07

2007

M0920

07M11

2008

M0120

08M03

2008

M0520

08M07

2008

M0920

08M11

2009

M0120

09M03

2009

M0520

09M07

2009

M0920

09M11

2010

M0120

10M03

2010

M0520

10M07

2010

M0920

10M11

2011

M0120

11M03

2011

M05In

flatio

n O

ver P

revi

ous

Year

Albania Bosnia and Herzegovina CroatiaMontenegro Serbia TfYR of Macedonia

Inflation in the CIS; back to 5-15%

-5

0

5

10

15

20

25

30

35

2007

M0120

07M03

2007

M0520

07M07

2007

M0920

07M11

2008

M0120

08M03

2008

M0520

08M07

2008

M0920

08M11

2009

M0120

09M03

2009

M0520

09M07

2009

M0920

09M11

2010

M0120

10M03

2010

M0520

10M07

2010

M0920

10M11

2011

M0120

11M03

2011

M05

Armenia Azerbaijan Belarus Georgia KazakhstanKyrgyzstan Moldova Russia Tajikistan Ukraine

Belarus Currency Crisis

Inflation in the ECE: Higher growth is associated with higher inflation

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

-4 .0 -2 .0 0.0 2.0 4.0 6 .0 8 .0 10.0 12.0

R e a l G D P G ro w th 2 0 1 1

Infla

tion

2011

S E E N M S Ad v a n c e d E C E E E C C A

Exchange Rates: General “Nominal”Depreciations vs US$

But Russia has had inflation of over 30%

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

2008M012008M04

2008M072008M10

2009M012009M04

2009M072009M10

2010M012010M04

2010M072010M10

2011M012011M04

Dep

reci

atio

n / A

ppre

ciat

ion

Albania Armenia Azerbaijan BelarusBosnia and Herzegovina Croatia Georgia KazakhstanKyrgyzstan Moldova, Republic of Montenegro Russian FederationSerbia Tajikistan The fYR of Macedonia TurkmenistanUkraine Uzbekistan

Real Trade-Weighted Exchange Rates (BIS)Jan 2008=1

0.6

0.7

0.8

0.9

1

1.1

1.2

Jan-04

Apr-04

Jul-0

4Oct-

04Ja

n-05Apr

-05Ju

l-05

Oct-05

Jan-06

Apr-06

Jul-0

6Oct-

06Ja

n-07Apr

-07Ju

l-07

Oct-07

Jan-08

Apr-08

Jul-0

8Oct-

08Ja

n-09Apr

-09Ju

l-09

Oct-09

Jan-10

Apr-10

Jul-1

0Oct-

10Ja

n-11Apr

-11Ju

l-11

Bulgaria Croatia Latvia Russia United States

Current Accounts: Reduced Imbalances in the EiT & NMSRussian Surplus & NMS/SEE Deficits Reduced

-16-14-12-10

-8-6-4-202468

1012

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Cur

rent

Acc

ount

Per

Cen

t of G

DP

NMS 10 ECCAA-11 Russia SEE-6

FDI: Solid Growth Pre-crisis, But Down 50% Post-crisis

FDI Inward Stock FDI Inflows

2000 2010

Per Cent Increase

2000 to 2010 2008 2009 2010

Per Cent Change 2008 to

2010 SEE-6 5.7 76.4 1,245 12.6 7.8 4.1 -67 Turkey 19.2 181.9 847 19.5 8.4 9.1 -53 Russia 32.2 423.2 1,214 75.0 36.5 41.2 -45 EECCA-11 23.0 188.3 720 33.4 27.3 22.9 -31EiT 80.1 869.7 986 140.5 80.0 77.3 -45 NMS 103.1 639.4 520 64.1 28.4 28.5 -56ECA 183.2 1,509.1 724 204.6 108.4 105.7 -48

Russian Capital Flight: Net Private Capital Outflows

-150

-125

-100

-75

-50

-25

0

25

50

75

100

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

US

$ B

illio

ns

Net Private Capital Flows

Russia’s International Reserve Assets

0

100

200

300

400

500

600

700

2_20

084_

2008

6_20

088_

2008

10_2

008

12_2

008

2_20

094_

2009

6_20

098_

2009

10_2

009

12_2

009

2_20

104_

2010

6_20

108_

2010

10_2

010

12_2

010

2_20

114_

2011

6_20

118_

2011

Bill

ions

of U

S $

Wealth Fund Reserve Fund CB Assets

Trade in the CIS: Solid Growth in 1st Half of 2011

0

10

20

30

40

50

60

70

Azerbaija

n

Armenia

BelarusKaza

khstanKyrgyzs

tan

Moldova

RussiaTaji

kistan

Ukraine CIS

Per c

ent C

hang

e Q

1-2

2011

/Q1-

2 20

10

Exports Imports

Geographical Distribution of Trade of ECA Economies

Exports To (Across) \ From (Down) Russia CIS-11 SEE-6 NMS-10 Adv EU ROWRussia 14.9 0.7 14.0 45.6 24.8CIS-11 15.1 8.5 0.8 8.0 41.7 25.9SEE-6 2.4 1.2 28.6 15.5 44.3 8.0NMS-10 4.5 3.5 2.5 20.0 60.0 9.5

Share of Exports Going to Each Sub-RegionBased upon 2008 Trade

Trade Developments

WTO Accession (10 EiT not members)Membership for Russia is imminent-the rush before PutinGood progress is being made for BiH

EU-Ukraine Association Agreement may be concluded by end of 2011Belarus-Kazakhstan-Russia customs union moving forth with additional initiatives, ie economic spaceEU Eastern Partnership (with Bel, Ukr, Mol, Arm, Aze, Geo) going nowhere; objective was to be trade and visa liberalization. Political problems as CIS becomes less democratic.EU Accession: Croatia in 2013, Montenegro & FYRM are candidates, Serbia maybe by year end. All have visa free travel to Schengen area except Kosovo. CEFTA increasing integration & promoting EU accessionDependence on foreign capital should/must decline. Promoting export-led growth requires supply-side policies (R&D, vocational education) and macro policies (raising domestic private savings,reducing public dis-saving, controlling credit growth and avoiding housing booms).

Government Fiscal Position:The end of Russian surpluses and larger deficits in SEE

-8

-6

-4

-2

0

2

4

6

8

10

2006 2007 2008 2009 2010 2011 2012 2013 2014

Gov

ernm

ent S

urpl

us/D

efic

it %

of G

DP

Russia EECCA minus Russia SEE-6 (Ex Turkey)

Eurozone Crisis Has Not Infected the EiT

While the US and several Eurozone economies have recently had sovereign credit rating downgrades, there have been upgrades in the Czech Republic, Hungary, Latvia, Romania, Serbia. Nevertheless SEE likely to impacted by negative developments in Greece and NMS by financial turmoil in eurozone, as a result growth for 2012 likely to be lower

Yield Spreads Have Remained Moderate Despite Eurozone Crisis

0

2 0 0

4 0 0

6 0 0

8 0 0

1 0 0 0

1 2 0 0

2006Q42007Q12007Q22007Q32007Q42008Q12008Q22008Q32008Q42009Q12009Q22009Q32009Q42010Q12010Q22010Q32010Q42011Q12011Q2

EM

BI Y

ield

Spr

ead

B u lg a ria H u n g a ry L it h u a n ia P o la n d C ro a t ia

S e rb ia 1 Tu rk e y G e o rg ia R u s s ia U k ra in e

Debt Service Percentage of Exports of Goods, Services, Income

0

10

20

30

40

50

60

70

80

90

BiHKos

ovo

Maced

onia,

fYR

Serbia

Turke

y

Armen

iaGeo

rgia

Kazakh

stan

Kyrgyz

stan

Moldov

aRus

siaTa

jikist

anUkra

ine

Bulgari

aLit

huan

iaDe

bt S

ervi

ce P

erce

ntag

e of

Exp

orts

, 200

9

Source:WB

Remittances: Percentage of GDP in 2006, 2008, 2010

05

101520253035404550

AlbaniaArm

enia

Azerbaij

anBela

rusBiH

BulgariaCroati

aGeo

rgia

UNMIK/KosovoKyrg

yzsta

nLith

uania

Maced

onia, FYR

MoldovaMonten

egroRomania

Serbia

Tajikistan

Ukraine

Rem

ittan

ces

% o

f GD

P

2006 2008 2010

Russian Remittances, 1995-2011

0

5,000

10,000

15,000

20,000

25,000

30,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

e

Mill

ions

US

$

Total Outflows

CIS Outflows

Total Inflows

CIS Inflows

Non-Performing Loans:Reasonable Threat and Little ImprovementWhat constitutes excessive NPL? Sweden in 1990s had NPL of 12% which required 5 of

7 banks to be rescued

0

5

10

15

20

25

30

35

40

Bulgari

aHun

gary

Latvi

aLit

huan

iaPola

ndRom

ania

Albania BiH

Croatia

Maced

onia,

fYR

Monen

egro

Serbia

Belarus

Kazakh

stan

Moldov

aRus

siaUkra

inePe

rcen

tage

of N

PL

2009 2010 2011

IMF Data: 2011 latest available

Foreign Currency Loans Remain a Vulnerability

0

10

20

30

40

50

60

70

80

Hungary Poland Bulgaria Romania Albania Croatia Serbia

Perc

enta

ge o

f Loa

ns D

enom

inat

ed in

Fo

reig

n C

urre

ncy

Croatia: Bank Credit to the Private Sector: 3/4 in Foreign Currency

Change in Net Borrowing of Household Sector in Hungary

Financial Sector Development

Financial sector still underdeveloped in central Asia: many have no bank accountRelated party lending (RPL) has been and remains widespread in the CIS

Created problems during crisis as solvency of banking system was uncertainRecent problem in Russia with VTB purchase of Bank of Moscow41% of all Russian loans in 2010 were RPL

Bank lending is rebounding, but credit growth muted. As in the advanced economies, SMEsstill not able to get credit

IMF Credit, Outstanding and Undrawn for ECAGRA-General Resources Account, PRGT- Poverty Reduction Growth Trust

G R A P R G T T o ta l

O u ts tan d in gA v ailab le U n d raw n

A lb a n ia 8 .1 24 .1 3 2.2 0.0B o sn ia & H erz eg o vin a 3 38 .2 0 .0 33 8.2 67 6.0U N M IK /K o s o vo 18 .8 0 .0 0.0 7 4.0S e rb ia 1,3 67 .7 0 .0 1 ,36 7.7 0.0T h e fY R o f M ac ed o n ia 1 97 .0 0 .0 19 7.0 21 6.0T u rke y 2,9 66 .7 0 .0 2 ,96 6.7 0.0 S E E 4,8 96 .5 24 .1 4 ,90 1.9 96 6.0 A rm e n ia 4 02 .9 10 6.7 50 9.7 15 8.0A z erb a ija n 0 .0 22 .2 2 2.2 0.0B elaru s 2,2 69 .5 0 .0 2 ,26 9.5 0.0G e o rg ia 5 77 .1 92 .2 66 9.3 0.0K yrg y z R ep u b l ic 0 .0 11 2.6 11 2.6 5 7.0M o ld o va 80 .0 22 9.8 30 9.8 15 0.0T ajikist an 0 .0 78 .3 7 8.3 2 6.0U krain e 9,2 50 .0 0 .0 9 ,25 0.0 7 ,75 0.0 EE C C A 1 2,5 79 .5 64 1.9 13 ,22 1.4 8 ,14 1.0 H u n g ary 7,6 37 .0 0 .0 7 ,63 7.0 0.0L atv ia 9 82 .2 0 .0 98 2.2 53 9.0P o lan d 0 .0 0 .0 0.0 19 ,16 6.0R o m an ia 1 0,5 69 .0 0 .0 10 ,56 9.0 3 ,09 1.0 N M S 1 9,1 88 .2 0 .0 19 ,18 8.2 22 ,79 6.0 E iT T o ta l 1 7,4 76 .1 66 6.0 18 ,12 3.3 9 ,10 7.0E C A T o t al 3 6,6 64 .3 66 6.0 37 ,31 1.5 31 ,90 3.0

Per capita Income and Government Effectiveness, late 2000s

Source: UNECE MDG 2011 Report

R2 = 0.6524

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Government effectiveness index

GN

I per

cap

ita (P

PP

$)

EECCA NMS OTHER SEE Expon. (OTHER)

EiT Longer Run Economic Objectives/Considerations

Increase the size of high-technology sectors and innovationIncrease foreign investment inflowsFrozen conflicts in Caucasus and central Asia limits attractiveness of the regionsNeed to increase the size of the tradeablessectorsLiberalization progress has slowed downEnergy exporters need to diversify to Asian marketsDemographic problems are especially acute for an emerging market

Main Lessons for EiT from the Global Financial Crisis

Limit the overall level of exposure to external capital markets, especially portfolio and bank loansLimit the domestic growth of credit to reasonable levelsLimit the degree of foreign currency denominated loans Consider the benefits of exchange rate flexibilityMinimize government fiscal deficitsDiversity production and exports; develop manufacturing and services sectorsDevelop and improve the governance of domestic financial systems Although those economies with a large export sector were more exposed, limiting trade integration is not a recommendation