Occasional Paper: Transition Countries Overall Make Progress Toward Macroeconomic Stabilization

Pages61-63

Page 61

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.

Macroeconomic Indicators

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...

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