Turmoil at twenty: World Bank report on crisis in ECA region

The KSE and the World Bank are organizing the presentation of the report "Turmoil at Twenty". It covers the current situation and discusses how ECA countries deal with the current crisis and what are the next steps required to restore economic growth.

The main lesson I draw from the report is that a sound macroeconomic policy helped to soften the impact of the crisis on countries like Czech Republic relative to countries like Latvia or Ukraine. Here, the emphasis on the exchange rate stability in Ukraine came at a large cost of inability of the NBU to fight high inflation and lack of independent monetary policy. As a result, forced exchange rate adjustments created a panic and led to the severe banking crisis leaving the NBU unprepared to fight the crisis more effectively.

Also, the degree of integration to the world economy was not the cause of the crisis but the channel through which market and governance imperfections amplified their negative impact. For example, a housing market bubble was developing because of highly inelastic supply due to the monopolization in the construction market and poor government regulations in the sector but it would not blow out of proportions without easy access to credit. An increasing concentration of exports in just a few commodities (metals and basic chemicals) was developing due to low competitiveness of firms in other sectors but would never reach 40% of total export without the commodity demand boom caused by overinvestment in China and other rapidly growing economies.

As a result, access liquidity and commodity price boom distorted the market incentives and led to the current situation. Hence, conditional on domestic imperfections that can not be fixed in the short run; there is a need for tools that would allow putting restraints on capital inflows and some sort of countercyclical fiscal stabilizers.

Last quick remark, I felt that the authors of the report are too soft on the financial institutions that failed spectacularly due to underestimation of the risks and provision of excessive credit. Also, the authors claim that the countries in the region have necessary tools and legislation to deal with non-performing loans. I feel, however, that at least in Ukraine, the procedure of bankruptcy is not clearly specified and the borrowers are poorly protected from unilateral changes by the financial institutions of the terms of borrowing.