Part VI. The Economic and Social Consequences of Financial Crises
6.6. Conclusions
The review of literature carried in section two shows that there is a substantial gap in existing writing on the consequences of financial crises. In particular, transition countries are rarely included in cross-country studies.
Also, due to data limitations, analyses attempting interna-tional comparisons usually not include the most recent cri-sis episodes, i.e. the Asian crises of 1997 and FSU crises of 1998 and 1999.
This paper tries to contribute its part in research on the various outcomes that are brought by financial turbu-lence. In particular, an attempt is made to assess the per-formance of transition economies in this respect and to include the newest available data, so that the analysis can cover the crises that emerged in 1997–1999.
The results of graphical presentations carried in sec-tion three remain broadly in line with other similar studies.
In some instances there is large variation in outcomes of crises in different sub-groups. The available data do not allow, however, for concluding that the crises of the last decade or the crises in transition economies – in terms of their consequences – differ from other financial crashes.
As for output trends, the general finding is that, on aver-age, after the sharp drop in a crisis year, GDP growth recovers gradually and starting from the second year after Table 6-2. Current account position before and after a crisis
Large CA deficit before a crisis
‘Safe’ CA position before a crisis
Large CA deficit after a crisis
‘Safe’ CA position after a crisis
No data after a crisis
13 4 9
16 5 8 3
Note: See text for more explanation.
Source: Own calculation based on IMF data (IFS for current account, WEO for GDP).
a crisis the rebound speeds up. Yet, available data do not allow for stating whether this increase may be maintained in a longer run. Also, taking a look at the development of particular components of GDP for the whole sample, a worrying factor is decelerating rate of investments already in the third year after a crisis (following a rebound observed in the second year). Another interesting obser-vation is that net capital inflows remain depressed for a long time after crises not reaching pre-crisis highs. This factor also suggests that the recovery may prove weak.
The evidence presented in this paper, although limited by the data availability, shows that various costs associated with financial crises are on average indeed high. A median of crises included in the sample led to a significant loss of output, increase in unemployment and also a fall in real wages. There are also many other negative consequences, such as sizable fiscal costs, deteriorating social stance, etc.
With respect to the positive outcomes of financial tur-bulence incidents, in some cases they provided stimulus for a change in economic policies and speeding up reforms.
However, often too, post-crises reforms proceed slowly because they are subject to social constraints and political pressures. Lower growth in the aftermath of a crisis does not help to overcome these problems. For example, in Southeast Asia restructuring process still remains in dire straits. Political tensions, if present, are unlikely to be removed by a crisis with Indonesia being an excellent example. The real sector, especially export oriented branches, benefit from increased competitiveness (although the data on export performance does not allow for making strong statistical inference). The simple exer-cise was carried in order to check whether crises are able to remove existing imbalances in the economies, thus reducing a threat of crisis reappearance. It proved that while this seems to be the case in some instances; in gen-eral, this cannot be demonstrated (the analysis was carried for current account balances).
Certainly, the scope for further research remains vast.
The experience of this paper shows that it is necessary to strengthen the available databases that would allow a more appropriate analysis of crises' impact, especially in the social sphere. Also, the influence on economic policies and institutions in crisis affected countries remains as a very promising and very important (due to its bearing on devel-opment) field for further research.
Appendix. The Definition of a Crisis
The pressure index that we use in order to identify cri-sis episodes is defined as follows:
EMPC,T= αC[(eC,T/ eC,T-1) -1] - β[(rC,T/rC,T-1) -1] + γ [(iC,T/iC,T-1) -1]
CrisisC,T =1 if EMPC,T> δ ∗ σEMP + µEMP
=0 otherwise, EMP– exchange market pressure index,
e – exchange rate (domestic currency vs. US dollar), i – domestic nominal interest rate,
r – reserves, C– country T– time
α, β, γ, δ– weights,
δEMP – the sample standard deviation µEMP – the sample mean
Appendix 2. The List of Countries Included in the Analysis
ALBANIA, ARGENTINA, ARMENIA, AZERBAIJAN, BELARUS, BOLIVIA, BRAZIL, BULGARIA, CHILE, CHINA, HONG KONG, CROATIA, CZECH REPUBLIC, ESTONIA, GEORGIA, HUNGARY, INDIA, INDONESIA, KAZAKHSTAN, KOREA, KYRGYZ REPUBLIC, LATVIA, LITHUANIA, MACEDONIA, MALAYSIA, MEXICO, MOLDOVA, PHILIPPINES, RUSSIA, SINGAPORE, SLO-VAK REPUBLIC, SLOVENIA, SRI LANKA, TAIWAN, TAJIKISTAN, THAILAND, TURKEY, TURKMENISTAN, UKRAINE, UZBEKISTAN, VENEZUELA.
Within the whole sample, the following sub-samples were identified:
Transition economies (TE): ALBANIA, ARMENIA, AZERBAIJAN, BELARUS, BULGARIA, CROATIA, CZECH REPUBLIC, ESTONIA, GEORGIA, HUNGARY, KAZA-KHSTAN, KYRGYZ REPUBLIC, LATVIA, LITHUANIA, MACEDONIA, MOLDOVA, RUSSIA, SLOVAK REPUBLIC, SLOVENIA, TAJIKISTAN, TURKMENISTAN, UKRAINE, UZBEKISTAN.
FSU countries that underwent a crisis in 1998/99 (FSU 98): BELARUS, GEORGIA, KAZAKHSTAN, KYRGYZ REPUBLIC, RUSSIA, UKRAINE.
Southeast Asian economies that underwent a crisis in 1997 (ASIA97): INDONESIA, KOREA, MALAYSIA, PHILIPPINES, THAILAND.
Latin American economies (LAM): ARGENTINA, BOLIVIA, BRAZIL, CHILE, MEXICO, VENEZUELA.
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7.1. Introduction
The IMF has supported the transition process in a number of FSU countries. This support involved conces-sionary financing, policy advice and technical assistance.
Notwithstanding temporary conflicts, the cooperation between the Fund and FSU countries throughout the peri-od was described by the Fund as generally successful. It was argued that it contributed to the macroeconomic and financial stabilization [1]. Yet, the financial crisis of 1998 wiped out this stabilization and proved that previous poli-cies were fully unsustainable. This paper attempts to answer the crucial question why countries collaborating closely with the IMF and implementing policies supported by the Fund had to undergo deep financial crisis. The ques-tion is made more intriguing by earlier research [2] show-ing that this was a first-generation crisis – that is, one caused by bad policies that led to macroeconomic imbal-ances. While the core of the problems was domestic, deterioration of external conditions was the trigger that started the inevitable collapse. True, it is also well under-stood now that vested interests, insufficient structural reforms and lack of political were crucial factors prevent-ing necessary policy adjustments. But has the Fund influ-enced the pace of structural reforms and fiscal tightening?
Should the IMF have been more insistent on reforms through tighter conditionality or have allowed for more reform ownership? Finally, should it have withdrawn long before 1998 and not underwritten unsustainable policies?
Before we proceed with addressing these questions we would like to make a short comment on the methodology.
In order to evaluate the impact of the IMF program on the economic situation we have to distinguish some specific
questions. First, the original design of the program (assump-tions and targets) and its adequacy for the economic prob-lems of the countries under investigation are discussed. Sec-ond, the implementation of the program is evaluated, espe-cially the compliance with the performance criteria. Third, if the IMF chooses to support the program even though some of its key parameters are breached, we conclude that the Fund is still sharing ownership for the final outcome.
One of the advantages of case studies, as opposed to large multi-country studies [3], is the ability not only to test the significance of the sheer existence of the program but also to better evaluate its key parameters and consider the qual-ity of its implementation. At the same time we believe that the group of countries under investigation – Russia, Ukraine, Moldova, Georgia and Kyrgyzstan (RUMGK) – is large and diversified enough to allow for some generaliza-tion of results.
There is also a problem of the baseline scenario against which one can compare the outcome of IMF-supported programs. In the literature [4] there are three major approaches. The before and after approach simply com-pares the situation in the country before and after the adoption of the IMF-supported programs. This approach is imperfect especially if the country has faced an important exogenous shock or had to undertake fundamental changes in its economic structure. For that reason, this approach is not suitable for the evaluation of programs in transition economies. Another popular approach is to compare countries that adopted the IMF program with countries of similar characteristics (in terms of economic structures and exposure to external shocks) that did not.
In the case of FSU countries there is no such control group as virtually all transition countries cooperated with the IMF [5]. The only theoretically reliable method of assess-ing the impact of this program is based on the construction