Economic Setback in Eastern Europe During 1998 and 1999

Among the transition countries covered in this article, only Hungary and Poland should maintain GDP growth up to 2000. Several countries achieved growth in the first half of the decade, but it was not sustainable because of transition deficiencies (Bulgaria, the Czech Republic, Romania). And the Kosovo crisis may end growth in some others (Croatia, Macedonia, Federal Republic of Yugoslavia). Ukraine never achieved a GDP expansion since 1989. There was marginal growth in Russia during 1997 (0.8 percent), but the financial crisis in August 1998 ended hopes for a continuation. A sharp reduction of exports to Russia had a marked negative impact on East-Central Europe, especially Bulgaria and Poland, without being the initial cause for recessionary tendencies. In the Czech Republic, the GDP decline resulted from rigid fiscal policy, high interest rates, a real appreciation of the currency and new central bank regulations that put an end to loan-financed loss-making of indigenous industrial giants. In Poland, high interest rates pushed the exchange rate to levels that undermined the competitiveness of firms and increased the current account deficit. In Slovakia, the years of high growth may be over and GDP might even decline. Less deficit spending and stricter regulation of the banking business are likely to depress aggregate demand next year. Hungary and Slovenia did not show any signs of recession so far. Hungary appears to be harvesting the results of years of strong inward FDI, but the repatriation of profits is now hurting the current account. Growth in Slovenia appears stable partly because economic policy gained room for manoeuvre by not permitting short-term capital flows from abroad.