## Convergence, Crisis, and Capacity Building in Emerging Europe

_IMF Blog, July 27, 2012_

## Source details

**Canonical URL:** [Convergence, Crisis, and Capacity Building in Emerging Europe](https://www.imf.org/en/blogs/articles/2012/07/27/convergence-crisis-and-capacity-building-in-emerging-europe)

## Other formats

- [Markdown version](/en/blogs/articles/2012/07/27/convergence-crisis-and-capacity-building-in-emerging-europe/index.md)
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## Bibliographic details
- Authors: Nemat Shafik
- Published: July 27, 2012

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### Overview and historical context
- Central, Eastern and Southeastern Europe moved from a communist planned system to a market economy in "two short decades".
- Living standards in the region "have converged towards those in the West."
- The region experienced major crises: "the break-up of the old Soviet system in the early 1990s," "the Russian financial crisis in 1998," and "the recent global economic crisis."

### Building blocks for stable economies
- IMF engagement in the early 1990s focused on "stable economies, price and trade liberalization, and privatization."
- IMF provided technical assistance and training that many countries "regarded ... as even more valuable than its lending and broader policy advice."
- Capacity building emphasized:
  - Creating new legal and regulatory tools.
  - Training qualified staff to "formulate policies and to execute them."
  - Developing skilled civil servants, many alumni of the Joint Vienna Institute, "a training center sponsored by the IMF, Austria, and other international institutions."

### Lessons from the crisis
- The investment in human capital "paid off handsomely" when the global economic crisis hit in 2008.
- Effects of the 2008 shock: "growth, trade and employment collapsed and default threatened some governments and financial institutions."
- The region avoided meltdown due to "quick and well-executed policies supported by unprecedented international financial support."
- The "ongoing crisis in the eurozone" is identified as "the main threat to recovery" because of close ties to Western Europe.
- Countries with persistent vulnerabilities included those with:
  - "substantial financing needs,"
  - "widespread foreign-currency lending,"
  - "banks saddled with high non-performing loans."
- Key lessons highlighted:
  - "Every boom—no matter how unsustainable—has a good story at the time." Imbalances such as "huge current account deficits and double-digit credit growth" were misinterpreted as benign convergence.
  - "Counter-cyclical policies may be insufficient to fully prevent a bust, but they can dampen it." Examples:
    - Estonia’s "conservative pre-crisis fiscal policy" that kept its budget under control and allowed it "to join the euro in 2011."
    - The National Bank of Poland’s "far-sighted prudential policies that discouraged foreign exchange denominated borrowing," reducing vulnerability.
  - "A decisive and well-designed policy response can help overcome the crisis quickly." Illustrations:
    - IMF support for "Latvia’s ambitious consolidation based on maintaining its currency peg."
    - IMF support for "the more conventional adjustments in Hungary, Romania or Ukraine."
    - Poland "managed to avert a recession altogether, thanks to a flexible exchange rate and apt policy response, supported by a financial backstop from the IMF."
  - "Two decades of capacity building bore fruit"—strong institutions and skilled policymakers are "key to sustaining the success."
  - "Well-coordinated international support and close cooperation between the public and private sectors make a difference." Examples:
    - "joint IMF-EU financial support programs in the region,"
    - the "Vienna Initiative" that "brought together governments, regionally active banks and international institutions to maintain lending levels to the private sector in the region."

### The look ahead — policy implications and recommended actions
- Country-level priorities:
  - "address vulnerabilities head-on" by:
    - "improving competitiveness,"
    - "reducing fiscal financing needs,"
    - "dealing with non-performing loans."
- International-level actions:
  - "reactivate the successful international cooperation of the recent past," including:
    - "the revival of the Vienna Initiative, taking into account the new circumstances for parent banks,"
    - potential financial support, "possibly precautionary, from the international community."
- The IMF commitment: "The IMF has stood by this region since the end of communism. We will continue to help whenever asked, with financing, policy advice, and capacity building."
- Confidence grounded in institutional capacity: "Given its institutional capacities, I am confident that the region will yet again be able to design and implement the policies necessary to meet these challenges."

*Source: Nemat Shafik, July 27, 2012 — Convergence, Crisis, and Capacity Building in Emerging Europe*

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## References

- [https://www.imf.org/wp-content/uploads/2011/10/nemat-shafik-thumbnail.jpg](https://www.imf.org/wp-content/uploads/2011/10/nemat-shafik-thumbnail.jpg)
- [region’s resilience and flexibility](http://www.imf.org/external/pubs/ft/survey/so/2012/CAR071912A.htm)
- [https://www.imf.org/wp-content/uploads/2012/07/minouche-blog-chart-july271.jpg](https://www.imf.org/wp-content/uploads/2012/07/minouche-blog-chart-july271.jpg)
- [technical assistance](http://www.imf.org/external/np/exr/facts/tech.htm)
- [crisis in the eurozone](http://www.imf.org/external/pubs/ft/survey/so/2012/INT071812A.htm)
- [non-performing loans](http://blogs.imf.org/2012/03/29/debt-hangover-nonperforming-loans-in-europes-emerging-economies/)
- [Vienna Initiative](http://www.imf.org/external/np/sec/pr/2012/pr12265.htm)
- [new circumstances for parent banks](http://www.imf.org/external/mmedia/view.aspx?vid=1686177862001)

_Source: https://www.imf.org/en/blogs/articles/2012/07/27/convergence-crisis-and-capacity-building-in-emerging-europe_