4 - Different Paths of Contraction, Recovery, and Growth

Summary

There is a further strong, although indirect argument convincingly proving that policies that have been actually executed are of critical importance for recession and growth, not the legacy from the past, or bad or good luck. The legacy sometimes may help, but in the postsocialist economies it more often hinders. Yet whatever is such a legacy, the policies do decide. This argument is based on the fact that, despite many structural, institutional, geopolitical and cultural similarities between these countries, they have been moving along quite different paths over the first decade of transition (EBRD 1999, Kolodko 2000a, Blejer and Skreb 2000). These paths have been (and are going to continue to be) much more shaped by the policies than by any other factors. And that is the main cause that whereas in certain countries the transitional recession lasted just three to five years, in some others it continued over the entire 1990s. Therefore, the current, i.e., the 2000 level of output, is a function of two occurrences. First, it is a result of the seriousness of output decline during the particular years of recession. Second, it is a consequence of the numbers of such years.

In some countries the contraction lasted for a shorter period of time, yet altogether it was deeper owing to more severe decline of output during that time. In some others the recession lasted for a longer period, yet it was milder because production dropped to a lesser degree in subsequent years. In the two countries most deeply affected by the Great Transitional Depression—that is in Moldova and Georgia—in 1999 GDP stood at about one third of pre-transition level. Whereas it is the outcome of eight years of contraction and two years of growth in the former case, in the latter it is the result of six years of contraction and four years of growth. Whereas there are countries, like Armenia, suffering recession for a period of only four years though it was enough to bring their national income down to about 40 percent of pre-transition level, there are also countries like Romania, where the output had been falling for seven years, nevertheless by 1999 it was brought down just to 76 percent (Table 4).