Turmoil at Twenty: Recession, Recovery and Reform in Central and Eastern Europe and the former Soviet Union

Table of contents......Page 6
Acknowledgments......Page 14
Overview......Page 16
1 Prelude to the crisis......Page 40
Figure 1.5 Capital flows in developing East Asia......Page 44
Transition meets global finance......Page 51
Would different macroeconomic policies have lessened vulnerability?......Page 69
Opening the toolkit......Page 75
Annex 1.1 Separating wheat from chaff —evidence of market differentiation from EMBI spreads......Page 84
Figure 1.1.1 Country-specific components of EMBI spreads......Page 85
2 How much adjustment? How much financing?......Page 90
Different shocks for different countries......Page 91
Figure 2.1 Mean private capital flows during the East Asian capital account crisis......Page 93
Crisis, adjustment, and financing in low-income and lower middle-income CIS countries......Page 106
Of parents and offspring: understanding rollover risks in ECA......Page 110
Three concluding arguments—three caveats......Page 128
Table 2.1.1 Comparison of information on claims in BIS data......Page 130
3 Restructuring bank, corporate, and household debt......Page 132
Financial systems need to be fixed......Page 133
For the lenders: bank restructuring......Page 137
For the borrowers: corporate and household debt restructuring......Page 142
Lessons on restructuring from previous banking and capital account crises......Page 157
Lessons for strengthening bank regulation and supervision......Page 163
4 Scaling up social safety nets......Page 178
Existing social assistance programs......Page 179
Figure 4.3 Targeting accuracy of overall safety-net benefits, by country, various years......Page 182
Figure 4.6 Coverage of means-tested programs, by country, 2004–08......Page 186
Cost of expanding means-tested programs......Page 188
An opportunity for further reform......Page 190
5 Prioritizing structural reform......Page 194
Interpreting business environment surveys......Page 195
Overview of results......Page 198
Growth bottlenecks......Page 200
The persistence of legacy in shaping the business environment......Page 211
Annex 5.1 Conceptual framework......Page 221
Annex 5.2 Moving away from the benchmark: firm characteristics and constraints......Page 225
Annex 5.3 Tables......Page 228
6 The day after......Page 234
Bottlenecks in electricity—an agenda for reform......Page 235
The education and skills agenda—making the grade......Page 252
Bibliography......Page 268
Box 1.1 Shades of vulnerability—a cluster analysis approach to classifying countries......Page 50
Box 1.2 Playing cat and mouse—staying ahead of regulation arbitrage in Southeastern Europe......Page 67
Box 1.3 Why foreign currency lending did not take off in the Czech Republic......Page 81
Box 2.1 Sticking together through thick and thin: the European Bank Coordination (Vienna) Initiative......Page 95
Box 2.2 From Bangkok to Budapest: ECA’s adjustment compared with East Asia’s......Page 101
Box 2.3 Countercyclical fiscal policy in financially integrated countries: Kazakhstan and the Russian Federation......Page 103
Box 2.4 Tajikistan’s declining remittances can hurt the poor disproportionately......Page 108
Box 2.5 Foreign ownership and funding sources......Page 122
Box 3.1 ECA’s growth prospects—green shoots? Maybe. High growth rates? Unlikely......Page 136
Box 3.3 An agenda for modern banking sector institutions in ECA countries......Page 166
Box 3.4 Capital—what is it and why require it?......Page 170
Box 3.5 Taking the rough with the smooth—dynamic provisioning in Spain......Page 173
Box 4.1 Aiming high to serve the poor: Georgia’s new Targeted Social Assistance Program......Page 183
Box 4.2 Enough bang for the buck? Safety nets in the Russian Federation......Page 187
Box 5.1 Transition economies converge in structure to market economies......Page 213
Box 5.2 Comparing constraints in transition (BEEPS 1999–2005) and nontransition (ICA) countries......Page 218
Box 6.1 Electricity tariff increases and poverty impacts......Page 242
Table 6.6 Students tutored by their own teachers......Page 264
Figure 1 Means-tested safety nets: targeting accuracy, coverage, and transfers to the poorest quintile......Page 29
Figure 1.2 Trade integration, by region, 1994–2008......Page 41
Figure 1.4 Labor integration, by country, 2007 and 2008......Page 42
Figure 1.7 Capital flows in Latin America and the Caribbean......Page 45
Figure 1.9 Real GDP growth, median values, 2000–08......Page 46
Figure 1.11 Inflation, median values, 2000–08......Page 47
Figure 1.13 External debt to GDP, median values, 2000–08......Page 48
Figure 1.14 Ratio of short-term debt to foreign exchange, median values, 2000–08......Page 49
Figure 1.16 Fiscal balance, median per group, 2000–08......Page 53
Figure 1.18 Short-term debt to foreign exchange reserves, median per group, 2000–08......Page 54
Figure 1.19 Bank ownership patterns in Europe and Central Asia transition economies, 1997 and 2005......Page 55
Figure 1.20 Banking crises in transition economies, 1990–2002......Page 56
Figure 1.22 Average return on assets, parent banks and competition, 2004–08......Page 57
Figure 1.24 Loans to deposits, median value, 2000–08......Page 59
Figure 1.25 Foreign exchange assets to liabilities, median value, 2000–08......Page 60
Figure 1.26 Liabilities to equity, median value, 2000–08......Page 61
Figure 1.27 Private sector credit developments in 2005–08: catch-up or excess?......Page 62
Figure 1.28 Real housing price developments......Page 64
Figure 1.29 Exchange rate regimes......Page 70
Figure 1.31 Average policy outcome/stance: fiscal policy, by group and period......Page 71
Figure 1.33 Average policy outcome/stance: nominal exchange rate volatility, by group and period......Page 72
Figure 1.35 Policy response to balance-of-payment pressures: fiscal policy, by group and period......Page 73
Figure 1.37 Policy response to changes in net foreign assets: sterilization of foreign exchange, by group and period......Page 74
Figure 1.39 Median current account balance, by group and period......Page 79
Figure 1.41 Policy response to balance-of-payment pressures: real eff ective exchange rate, by group and period......Page 80
Figure 1.2.2 Bank efficiency in ECA’s transition economies, median values, 1995–2007......Page 86
Table 1.2.1 Comparing ECA’s transition economies with other regions......Page 87
Figure 2.2 Crisis, adjustment, and financing in financially integrated Europe and Central Asia economies......Page 98
Figure 2.3 Crisis, adjustment, and financing in financially integrated oil-exporting Europe and Central Asia economies......Page 99
Figure 2.4 Public and private sector balances in low-income and lower middle-income CIS countries, 2008–10......Page 109
Figure 2.5 Banking sector credit—national and domestic sources......Page 111
Figure 2.6 International claims, end-2008......Page 114
Figure 2.7 Foreign claims, end-2008......Page 115
Figure 2.8b Foreign exchange liabilities, Republic of Korea and financially integrated ECA countries......Page 117
Figure 2.10 Resident retail deposits, by country, 2007–09......Page 120
Figure 2.11 Parent bank funding, by country, 2007–09......Page 121
Figure 2.13 Loans with a maturity of five years or more, by country, 2007–09......Page 123
Figure 2.15 Currency composition, by country, March 2009......Page 124
Figure 3.1a Average duration and change in output of recessions, by type......Page 134
Figure 3.1b Average duration and change in output of recoveries, by type......Page 135
Figure 3.3 Household debt, earlier EU members, 1995–2004......Page 148
Figure 3.5 Foreign currency-denominated loans, by country, 2008......Page 149
Figure 3.6 Mortgage loans with adjustable interest rates, by country, 2006......Page 150
Figure 3.7 Mortgage interest service and interest rate shock, by income quintile......Page 151
Figure 3.8a Total debt service under shocks......Page 152
Figure 3.8b Total debt service under shocks......Page 153
Figure 3.9a Ratio of actual to minimum required capital-asset ratio......Page 164
Figure 3.9b Supervisory agency can legally declare a bank insolvent......Page 165
Figure 4.1 Spending on overall safety nets, by country, 2006–08......Page 180
Figure 4.2 Coverage of overall safety nets, by country, various years......Page 181
Figure 4.4 How ready are ECA’s safety nets for rapid crisis response? A typology of countries......Page 184
Figure 4.5 Targeting accuracy of means-tested programs, by country, 2004–08......Page 185
Figure 5.1 Average business environment constraint: transition economies in 1999, 2002, 2005, 2008, and nontransition economies......Page 196
Figure 5.3 Infrastructure bottlenecks—electricity, 1999–2008......Page 202
Figure 5.5 Access to land, 1999–2008......Page 203
Figure 5.6 Skills bottlenecks, 1999–2008......Page 204
Figure 5.7 Corruption, priority measure, 1999–2008......Page 206
Figure 5.9 Tax administration: priority measure, 1999–2008......Page 207
Figure 5.10 Customs regulations: priority measure, 1999–2008......Page 208
Figure 5.11 Financing expansion—internal finance......Page 209
Figure 5.13 Financing expansion—external financing, constraint priority......Page 210
Figure 5.15 Skills: priority measure, 1999–2005......Page 215
Figure 5.16 Legal environment: priority measure, 1999–2005......Page 216
Figure 5.17 Labor regulation: priority measure, 1999–2005......Page 217
Figure 5.1.1 Demand and supply of public goods—one country, two firms......Page 222
Figure 5.1.2 Demand and supply of public goods......Page 223
Figure 5.1.3 Two transition economies, two nontransition economies (and many firms)......Page 224
Figure 6.1 Relative importance of constraints, by country groups......Page 236
Figure 6.2 Investment commitments in electricity with private participation, 1993–2007......Page 237
Figure 6.3 Evolution of average collection rates in ECA countries......Page 238
Figure 6.4 Weighted average electricity tariffs, 2008 (US cents per kilowatt-hour, excluding taxes)......Page 241
Figure 6.5 Present structure of ECA electricity markets......Page 244
Figure 6.7 Worker education: change in the frequency of satisfied firms between 2005 and 2008......Page 253
Figure 6.8c 2007 TIMSS—mean content scores in grade 4 science......Page 255
Figure 6.9b 2007 TIMSS—mean cognitive scores in grade 8 math......Page 256
Figure 6.10a PISA math scores......Page 257
Figure 6.10b PISA science scores......Page 258
Figure 6.11b PISA math scores—difference between quintile 5 and quintile 1......Page 259
Figure 6.12 Positive and negative shifts in employment participation in 1995–2006, by occupation......Page 260
Figure 6.13 Kazakhstan survey of fi rms, 2008: importance of general competencies and technical skills......Page 262
Map 1 Income convergence to the EU15 average income, 2000–09......Page 18
Table 1 Credit market characteristics in financially integrated countries......Page 25
Table 1.1 Savings–investments balance......Page 52
Table 1.2 Evolution of banking sector indicators, by country, 1999–2008......Page 58
Table 1.3 Growth and composition of credit to the private sector......Page 65
Table 2.1 Savings–investment balances, adjustment without official financing......Page 97
Table 2.2 Savings–investment balances, adjustment with official financing......Page 105
Table 2.3 Direct lending as a share of total national credit, by country, 2005–09......Page 113
Table 2.4 International claims, by country, 2000–09......Page 116
Table 2.5 Stability of funding sources......Page 118
Table 2.6 Index of home country concentration of parent bank exposure, international claims......Page 126
Table 2.7 Importance of lending in foreign exchange among parent-subsidiary banks......Page 127
Table 2.1.2 Sectoral breakdown in BIS data......Page 131
Table 3.1 Countries with banking and currency crises and nonperforming loans as a share of total loans......Page 141
Table 3.2 Credit losses—extrapolating from past crisis events......Page 143
Table 3.3 Median nonfinancial corporate leverage, Europe and Central Asia countries and EU cohesion countries, 1999–2008, and comparator countries for years of crisis......Page 144
Table 3.4 Median nonfinancial corporate leverage, by country, 2008......Page 145
Table 3.5 Median interest coverage in nonfinancial firms, Europe and Central Asia countries and EU Cohesion countries, 1999–2008, and comparator countries for years of crisis......Page 146
Table 3.6 Median interest coverage ratio in nonfinancial firms, by country, 2008......Page 147
Table 4.1 Transfer to beneficiaries in the poorest quintile, by country, various years......Page 189
Table 4.2 Percentage of transfers through means-tested programs to overall safety net transfers, by country, various years......Page 191
Table 5.1 Levels and priorities of constraints on business in BEEPS 4 and other surveys......Page 197
Table 6.1 Total technical and commercial losses in ECA countries......Page 240
Table 6.2 Regulatory institutions in ECA countries......Page 246
Table 6.3 Implementation of the directive 2003/54/EC in the contracting parties to the treaty establishing the energy community, December 2008......Page 250
Table 6.4 Features of electricity systems in Central Asia......Page 251
Table 6.5 Russian Federation—wage premia for additional schooling......Page 261