Download Boris Vujcic

Panel on Growth and
Macroeconomic Volatlity
Univ. Pompeu Fabra, Barcelona
Boris Vujcic
Why are poor countries more
vulnerable to shocks?
• Interaction of many correlated factors
– high dependence on few commodities vs. developed
countries which are more diversified
– technological disadvantages (i.e. in agriculture more
developed countries use more machinery, fertilizers,
pesticides, irrigation etc. while in manufacturing they
use better more complex technologies, more
varieties)
– lack of financial market development – resource
allocation, risk sharing among individuals, refinancing
possibilities
– high (short-term) debt ratios
Why are poor countries more
vulnerable to shocks?
– institutional underdevelopment (weak regulatory
structures, corruption...)
– inadequate macroeconomic policies, i.e. inability to
conduct countercyclical fiscal policies, poor
monetary/exchange rate management, uncontrolled
financial market liberalization (which themselves are
not independent of weak institutions)
– the effects of trade openness on volatility-growth link
appear more ambiguous, but could hardly lead to
policy advice to close the economy to trade (opposite
to conventional wisdom from growth literature)
Why are poor countries more
vulnerable to shocks?
• typically these factors that make countries more
vulnerable to shocks come in bundles
• found in underdeveloped economies, correlated, like
transition indicators (might be nice to have indicators of
the sort that EBRD publishes for transition countries for
the rest of the developing countries, alongside available
vulnerability indicators from crisis and volatility literature)
• so, to deal with vulnerabilities most often you have to
deal with development/growth issues at large
Crises
• The negative impact on growth is not the effect of small
repeated cyclical deviations but of large drops below
output trend. The volatility due to crisis and not due to
normal times harms the economy's long-run growth
performance.
• Vulnerability to shocks leads to crises of different sorts
• We know much about crises, but are still not very good
at predicting them
What policies to deal with
shocks/crises?
• bottom line, after a long detour through empirical growth
(volatility) research and some theory - the volatility
literature brings us right back to basic policy issues: how
to build institutions, how to sequence reforms, how to
handle crisis, political economy of fiscal policy etc.
• we know that we need to build competent institutions,
robust financial and regulatory systems,flexible labor
markets, run countercyclical fiscal policies, elliminate
corruption, diversify exports, output and tax base, keep
debt levels low etc., but it is much less obvious why, in
so many cases, it does not happen
What policies to deal with shocks
/crises?
• good deal of growth literature leads us to the history and
geography as main explanations why some countries are
better able to cope with those issues, while others are
not
• that might be true, but is also a good excuse for
policymakers (whoever they are) to be easily accepted
• a brief example of different ways Croatia has dealt with
its recent crises
Croatia - social product per capita
(1980=100)
120
100
80
60
40
20
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
0
Consumer prices in Croatia
(annual inflation)
10000
1200%
1518%
Log scale, %
1000
100
25%
27%
10
0
Croatia
Hungary
Source: CBS, WIIW and Central bank of Hungary
Poland
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
1957
1955
1
Source: Feige, E. (2002)
Macedonia
Poland
Hungary
Lithuania
Estonia
Czech Republic
Slovak Republic
Romania
Slovenia
Bulgaria
Latvia
Croatia
The degree of dollarization in transition
economies
80%
70%
60%
50%
40%
30%
20%
10%
0%
GDP growth - Croatia
10
5,9
5,9
6,8
2,9
2,5
5
4,4
5,2
4,3
3,8
-0,9
0
rate, %
6,8
-5
-10
-11,7
-15
-8,0
-20
-25
-21,1
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Inflation and exchange rate
stabilisation
10
9,0
8
8,0
6
7,0
1.149,3
5,0
4,0
400
0
200
-2
2,0
-4
1,0
1/05.
7/04.
1/04.
1/03.
7/03.
7/02.
1/02.
7/01.
1/01.
1/00.
7/00.
7/99.
0,0
1/99.
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
7/98.
-3,0
1/98.
0
3,0
7/97.
2 %
7/96.
1/97.
1,7
1/96.
1,9
6,0
7/95.
600
4
1/95.
%
2,7
7/94.
2,3
1/94.
3,8
1/93.
7/93.
3,7 3,4
800
4,4
7/92.
5,4
1.000
HRK/EUR
7,4
1.200
1/92.
1.400
Banking system by ownership,
in % of total assets
1,0
100%
4,0
6,7
20,7
39,9
80%
54,1
50,3
60%
84,1
89,3
90,2
91,0
91,3
5,7
5,6
5,0
5,8
4,0
5,6
3,4
5,6
3,1
2000
2001
2002
2003
2004
14,5
40%
78,4
41,9
20%
43,1
45,6
10,2
0%
1996
1997
State owned*
Source: CNB.
1998
1999
Other private domestic banks
Foreign owned banks
• shocks/crises (externally or internally induced) might not
be that bad if they result in right policy reaction
• why policy reaction in 80s was poor, and in 90s good?
• because of the political change which has enabled
institutions for such a reaction
• therefore, politics is very important (politicians rule the
world, not the economists)
• but, what makes politics change? again
history/geography? or do we have a better answer?
– domestically or externally induced, but in both cases
they happen exactly because the country is
vulnerable to shocks/crisis
– at lower levels of development this crises are more
likely to be induced by supply/demand shocks like
draughts, floods, diseases, TOT shocks in commodity
markets
– at intermediate levels of development more likely to
take some form of BOP/Banking/Currency crisis
which can again be induced by adverse
supply/demand shocks or/and by poor
macroeconomic/regulatory management