Finding a Balance between Growth and Vulnerability Trade-Offs : Lessons from Emerging Europe and the CIS

This paper examines the growth patterns of emerging Europe and the Commonwealth of Independent States (CIS) countries prior to the global financial crisis. The aim is to draw lessons on what policies can best position these countries going forward to enjoy growth without a buildup in macro and financial vulnerability. Cluster analysis is used to classify these countries across the growth and vulnerability dimensions; namely, a classification into low or high growth outcomes, each of which may occur with low or high vulnerability features. The vulnerability indicators used are multifaceted, covering both the domestic and the external dimensions that have been identified in previous studies as being good indicators of likelihood of crisis -- itself understood as multidimensional. Based on multinomial logit regressions, the initial conditions and the economic policies that might affect the probabilities of being in each of the four possible cluster combinations are examined. Many (if not most) of the countries in the sample experienced very large capital inflows relative to their gross domestic product prior to the crisis, which can complicate macroeconomic management and lead to a buildup of vulnerability. These large inflows were partly due to the high liquidity in global markets and, at least for some countries in the country sample, the particular attractiveness of "new Europe and emerging countries in the region" in the eyes of foreign investors. Nonetheless, the analysis finds strong evidence that the macroeconomic and structural policies that over time influence the structure of the economy, can play a significant role in explaining (and, going forward, in influencing) the different growth and vulnerability patterns experienced by the countries covered in this paper.

Bibliographic Details

Main Authors:	Ghosh, Swati, Sugawara, Naotaka, Zalduendo, Juan
Language:	English
Published:	2011-03-01
Subjects:	AGGREGATE DEMAND, AMERICAN ECONOMIC REVIEW, ASSET PRICES, ASSETS, BALANCE OF PAYMENTS, BALANCE SHEET, BALANCE SHEETS, BANKING SECTOR, BANKING SECTOR DEVELOPMENTS, BROAD MONEY, BUSINESS CYCLE, CAPITAL ACCOUNT, CAPITAL ACCOUNT LIBERALIZATION, CAPITAL ACCOUNT OPENNESS, CAPITAL CONTROLS, CAPITAL FLOWS, CAPITAL INFLOWS, CAPITAL MARKET, CAPITAL OUTFLOWS, CAPITAL TRANSACTIONS, CHECKS, COLLATERAL, COMMERCIAL BANKS, CREDIT BOOM, CREDIT BOOMS, CREDIT GROWTH, CURRENT ACCOUNT, CURRENT ACCOUNT DEFICIT, CURRENT ACCOUNT DEFICITS, CYCLICAL FACTORS, CYCLICAL FISCAL POLICY, DEBT DATA, DEBT RATIOS, DEPENDENT VARIABLES, DEPOSIT, DESCRIPTIVE STATISTICS, DEVELOPMENT ECONOMICS, DEVELOPMENT POLICY, DIVERSIFICATION, DOMESTIC CREDIT, DOMESTIC DEMAND, ECONOMETRIC EVIDENCE, ECONOMIC ACTIVITY, ECONOMIC CONDITIONS, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, ECONOMIC OUTLOOK, ECONOMIC OVERHEATING, ECONOMIC POLICIES, ECONOMIC SLOWDOWN, ECONOMIC STRUCTURE, EMERGING MARKETS, EMPIRICAL REGULARITIES, EMPIRICAL RESULTS, ESTIMATED COEFFICIENT, ESTIMATED COEFFICIENTS, ESTIMATION RESULTS, EXCHANGE ARRANGEMENTS, EXCHANGE RATE, EXCHANGE RATE ARRANGEMENTS, EXCHANGE RATE FLEXIBILITY, EXCHANGE RATE POLICIES, EXCHANGE RATE REGIME, EXCHANGE RATE REGIME CLASSIFICATION, EXCHANGE RESTRICTIONS, EXPERIENCE OF COUNTRIES, EXPORT PERFORMANCE, EXTERNAL ASSETS, EXTERNAL DEBT, EXTERNAL IMBALANCES, EXTERNAL POSITIONS, EXTERNAL SHORT-TERM DEBT, EXTERNAL VULNERABILITY, FINANCIAL CRISES, FINANCIAL CRISIS, FINANCIAL DEVELOPMENT, FINANCIAL OPENNESS, FINANCIAL SECTOR, FINANCIAL VULNERABILITY, FISCAL BALANCE, FISCAL BALANCES, FISCAL DEFICIT, FISCAL DEFICITS, FISCAL POLICIES, FISCAL POLICY, FLEXIBLE EXCHANGE RATES, FOREIGN ASSETS, FOREIGN DIRECT INVESTMENT, FOREIGN EXCHANGE, FOREIGN EXCHANGE RESERVE, FOREIGN EXCHANGE RESERVES, FOREIGN INVESTORS, FOREIGN LIABILITIES, FOREIGN RESERVES, GDP, GLOBAL CONDITIONS, GLOBAL LIQUIDITY, GLOBAL MARKETS, GOVERNMENT EXPENDITURE, GROSS DOMESTIC PRODUCT, GROWTH DETERMINANTS, GROWTH IMPACT, GROWTH MODEL, GROWTH RATE, GROWTH RATES, HIGH GROWTH, HISTORY OF EXCHANGE RATE, IMBALANCES, IMPORT, IMPORT GROWTH, IMPORTS, INCOME, INCOME LEVEL, INDEPENDENT VARIABLES, INDIVIDUAL COUNTRIES, INFLATION, INTERNATIONAL BANK, INTERNATIONAL MONETARY FUND, INVESTMENT RISKS, LEVEL OF DEVELOPMENT, LEVEL OF INCOME, LIQUIDITY, LOAN, LOCAL CURRENCY, MACROECONOMIC MANAGEMENT, MACROECONOMIC OVERHEATING, MARKET UNCERTAINTY, MARKET VOLATILITY, MATURITY, MONETARY CONDITIONS, MONETARY FUND, MONETARY POLICIES, MONETARY POLICY, NATIONAL BANK, NEGATIVE IMPACT, NEGATIVE IMPACT ON GROWTH, NOMINAL EXCHANGE RATE, OIL PRICES, OVERVALUATION, POLICY ANALYSIS, POLICY MAKERS, POLICY RESEARCH, POLICY VARIABLES, POVERTY REDUCTION, PRIVATE LOAN, PRIVATE SECTOR, PRIVATE SECTOR CREDIT, PRODUCTIVE INVESTMENTS, PUBLIC EXPENDITURE, PUBLIC FINANCES, PUSH FACTORS, RAPID GROWTH, REAL EFFECTIVE EXCHANGE RATE, REAL EXCHANGE RATE, REAL EXCHANGE RATE OVERVALUATION, REAL GDP, REAL INTEREST, REAL INTEREST RATES, RECESSION, RECESSIONS, REGRESSION ANALYSIS, RELATIVE IMPORTANCE, RISK AVERSION, SHORT TERM DEBT, SHORT-TERM DEBT, STANDARD DEVIATION, STANDARD ERRORS, STRUCTURAL POLICIES, TOTAL EXPORTS, TRADE BALANCE, TRADE OPENNESS, TRANSITION COUNTRIES, TRANSITION PATH, TROUGH, UNCERTAINTY, UPWARD PRESSURES, VOLATILITY,
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110328114049 https://hdl.handle.net/10986/3380
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