The 15 countries that comprised the Soviet Union until its dissolution in 1991 have collectively made significant progress toward macroeconomic stabilization. Individually, though, some countries have done better than others for a number of reasons:
- different initial conditions,
- uneven factor endowments (land, labor, capital, and entrepreneurial skills),
- differences in financial policies, and
- differences in how quickly they implemented comprehensive structural reforms.
This progress can be seen in a number of recent trends in these countries as a group: inflation is down, growth is up, monetary management has improved, nominal exchange rates are stabilizing, payments and settlement systems have been enhanced, and bank restructuring is under way.
Despite the evidence of progress, however, Valdivieso acknowledges that sources of vulnerability persist that, if left unattended, may complicate macroeconomic management in these countries. Among them, he lists fragile public finances, weak banking systems, and concerns about the sustainability of the sizable external current account deficits that exist in a number of the countries.
To present his findings, Valdivieso classifies the countries into four groups: advanced, intermediate, and slow reformers, and countries that have experienced some measure of military conflict during the transition (see box). Countries may implement sound macroeconomic policies, he notes, but unless they also institute comprehensive structural reforms, the stability they have achieved is threatened and their vulnerability to external and domestic shocks is increased. Valdivieso cites evidence that countries that acted quickly and decisively to lower inflation and implement structural reforms have benefited the most in terms of output growth, exchange rate stability, and access to private international capital markets. Countries that have not consistently exercised financial restraint and whose implementation of structural reforms has been tentative have fared less well.
One key achievement of the 15 countries as a group, he notes, is the sustained and significant reduction in inflation. In 1997, inflation in the region—measured on the basis of the consumer price index—averaged 29 percent, down from more than 1,500 percent a year in 1992-94 (see chart, page 62). The three advanced reformers brought inflation down to 9.5 percent in 1997. The intermediate reformers and those countries that have emerged from a period of civil unrest have also made considerable progress, unlike the slow reformers, where price stability has proved elusive.
Enhanced price stability, accompanied by structural reform, has laid the foundation for a revival of economic activity throughout the region, although growth in the slow reformers continues to be erratic. The most advanced reformers not only reestablished growth the earliest but have been able to sustain it at relatively high levels (chart). The diverse experiences of the 15 countries during 1992-97, Valdivieso notes, support the widely held belief that, although low inflation is necessary for growth, it is not enough to ensure it. He reiterates that countries must tackle the structural weaknesses that underlie their macroeconomic imbalances.
Estonia • Latvia • Lithuania
Kazakhstan • Kyrgyz Republic • Moldova • Russia
Belarus • Turkmenistan • Ukraine • Uzbekistan
Countries affected by conflict
Armenia • Azerbaijan • Georgia • Tajikistan
Growth and Inflation
Data: IMF Occasional Paper 175, Macroeconomic Developments in the Baltics, Russia, and Other Countries of the Former Soviet Union, 1992-97
Those countries that have had the greatest success lowering inflation and rekindling growth are those that have also exercised greater financial restraint. For the region as a whole, the general government deficit declined to about 3 percent on average in 1997 from 10 percent in 1992-94. Advanced reformers have generally recorded low fiscal deficits, while the intermediate reformers and countries affected by conflict reduced their deficits to 5-8 percent of GDP during 1995-96 from 10-40 percent in 1992-94 through fiscal retrenchment. Among the slow reformers, Ukraine’s deficit exceeded 5 percent of GDP in 1997. The others had relatively low average deficits, but not because of a deliberate fiscal effort. Rather, less direct budget financing and the practice of subsidizing other economic sectors through the banking system kept these countries’ deficits down.
In 1997, for the first time in six years, all 15 countries recorded deficits in their external current accounts, with different factors underlying the deficits in the different groups. For example, the advanced and intermediate reformers resorted increasingly to external savings to meet their rising investment needs—associated with the resumption of output growth—because of flow domestic private savings and, in most cases, public sector consumption that exceeded current income. However, external developments in these countries as a group have occurred in the context of a trend toward relative stability in nominal and real exchange rates.
By the end of1997, the region’s external debt picture appeared generally favorable, with total external debt for the 15 countries amounting to about $150 billion, or 31 percent of GDP on average. However, in 5 of the 15 countries, the debt burden approached or exceeded 50 percent of GDP and remains a source of concern.
Some of the countries in this region have gained access to international private capital markets and have been able to attract foreign direct investment. During 1992-97, flows of foreign direct investment amounted to almost $27 billion, most of which has been directed to the advanced and intermediate reformers and to countries developing their natural resources.
Initial Impact of the Asian Crisis
The study, which covers developments through early 1998, notes that the Asian crisis had a significant initial effect on the financial and foreign exchange markets of a number of the countries in this region, with the impact varying according to the level of development and degree of international integration of domestic financial markets, preexisting economic weaknesses and policy problems, and the importance of their economic links with the crisis countries. Estonia, Russia, and Ukraine were the hardest hit; the other countries were less affected because domestic financial markets and international integration are at an early stage of development. The Asian crisis initially also hampered these countries’ access to international bond and credit markets by causing the cost of issuing international bonds to increase markedly. Ultimately, though, the study suggests that the region’s rising growth trend is not expected to be halted. In the preface to his study, Valdivieso qualifies these projections, saying that subsequent events are expected to worsen inflation and short-term growth prospects in Russia and have a negative impact on growth in the rest of the region. Nonetheless, he maintains that the current crisis in Russia does not invalidate the main views advanced in this study.
Copies of Occasional Paper 175, Macroeconomic Developments in the Baltics, Russia, and Other Countries of the Former Soviet Union, 1992-97, by Luis M. Valdivieso, are available for $18.00 each from IMF Publication Services. See page 56 for ordering details.