Convergence, Crisis, and Capacity Building: The Joint Vienna Institute in the Transition Process

IMF News, July 12, 2012

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Authors: Nemat Shafik
Published: July 12, 2012

Introduction

Speech delivered by Nemat Shafik, Deputy Managing Director of the International Monetary Fund, Vienna, Austria, July 12, 2012.
Purpose: brief review of the Fund’s role in the Eastern European transition countries, with emphasis on capacity building and the Joint Vienna Institute (JVI).
Framing: region moved from planned to market economies with living standards converging toward the West, while overcoming three major crises: the early 1990s break-up, the Russian crisis in 1998, and the global financial crisis.

The transition 1990-2008

IMF focus in early transition: macro stabilization, price and trade liberalization, and privatization.
Role evolution:
- Early visible phase ended by the early 2000s as many countries “were able to stand on its own feet.”
- EU accession served as a strong policy anchor; eight new members from the region acceded in May 2004; Bulgaria and Romania followed soon thereafter.
- IMF engagement continued through preparation for euro adoption, macro policy framing in several CIS and Balkan countries, and surveillance that warned of vulnerability build-up.
Capacity building as an enduring priority:
- Most post-Communist countries lacked basic market-economy institutions: monetary policy conducted centrally (Moscow or Belgrade), revenue generation through state enterprises, barter or bilateral trade settlements, absence of bankruptcy procedures and market regulation.
- IMF technical assistance from its own resources amounted to some 245 staff years in 1990-2000, representing a quarter of all its technical assistance during this time.
- JVI founded in 1992 in Austria with the aim of providing training and guidance; Austria provided know-how, facilities and substantial funding.
JVI achievements (examples):
- Creation, from scratch, of monetary authorities in the 15 new states that emerged from the Soviet Union; rapid training needs in macroeconomic analysis, monetary and foreign currency operations, and financial supervision.
- Creation of modern fiscal institutions including national treasury systems; training needs in macroeconomic analysis and forecasting, tax administration, payment processing, accounting, fiscal reporting and financial management.
JVI participation metrics:
- Altogether, almost 30,000 officials have participated in JVI courses since its inception, about half of them offered by the IMF.

The crisis 2008-10

Shock description:
- The collapse of Lehman Brothers triggered a severe regional downturn: post-EU accession boom ended, with growth, trade and employment collapsing and some governments and financial institutions threatened by default.
- Economist magazine posed in March 2009: “Can Eastern Europe avoid meltdown?”
International financial support:
- Altogether, the international community made available about € 100 billon.
- The IMF provided about 70 percent through various facilities adapted to the circumstances.
- The European Commission (primarily through its Balance of Payments facility for EU member states), the World Bank and the European Bank for Reconstruction and Development contributed both financially and with know-how.
- Not all of the funds were drawn as the crisis abated.
Policy lessons and findings:
- Rapid convergence can mask large imbalances; huge current account deficits and double-digit credit growth proved dangerous once the downturn hit.
- Counter-cyclical policies can dampen but may not fully prevent a bust: Estonia’s conservative pre-crisis fiscal policy enabled euro accession mid-crisis; National Bank of Poland’s prudential policies discouraged foreign-exchange borrowing, reducing vulnerability.
- Decisive, well-designed, and internally consistent policy responses aid recovery; examples include Latvia’s consolidation maintaining its currency peg, conventional adjustments in Hungary, Romania and Ukraine, and Poland’s avoidance of recession via a flexible exchange rate and IMF-backed financial backstop.
- Two decades of capacity building contributed significantly to the region’s crisis response; many JVI alumni were central to this resilience.
- The Vienna Initiative, a key element in crisis resolution, was brought to life at the JVI in January 2009, reflecting trust and coordination fostered by the JVI.

The second stage of the crisis and the path ahead

Stabilization and ongoing risks:
- By late 2009, Eastern Europe began to stabilize; eurozone turmoil had delayed spillovers into the region until mid-2011.
- Continued exposure to the eurozone crisis due to close financial and economic ties.
Countries most at risk:
- Those with substantial financing needs, widespread foreign-currency lending, and banks with high non-performing loans experienced the largest spillovers when the crisis intensified in the second half of 2011.
Policy prescriptions at country level:
- Address vulnerabilities head-on by improving competitiveness, reducing fiscal financing needs, and dealing with non-performing loans.
- Design and implement policies consistent with country circumstances; there is no one-size-fits-all solution.
International cooperation:
- Reactivate successful international cooperation mechanisms from 2008-09, including revival of the Vienna Initiative adapted for new parent-bank circumstances.
- Consider financial support, possibly precautionary, from the international community.
IMF commitment:
- IMF will continue to help when asked, with financing, policy advice and capacity building.
JVI adaptation to evolving training needs:
- Officials from new EU member states require fewer basic courses (e.g., financial programming or budgeting) and more specialized courses (e.g., macro modeling or fiscal rules).
- Enrollment from advanced converging countries is declining and shifting to specialized topics.
- Countries with less advanced convergence increasingly use the enlarged JVI curriculum, often linked with IMF technical assistance.

Conclusion

Central thesis: institutional capacity—skilled policy makers and staff—underpinned successful transition and crisis resolution.
The 2008-9 crisis resolution was materially aided by two decades of institutional capacity building, mutual trust, and strong institutions fostered by the JVI.
The JVI has created a network of officials open to learning from each other, enhancing flexibility and resilience in the region.
Outlook: the region’s institutional capacity, flexibility and resilience position it well to meet future challenges.
Closing remark: congratulatory note to JVI on its 20th anniversary and appreciation for its contribution.

Source: Convergence, Crisis, and Capacity Building: The Joint Vienna Institute in the Transition Process By Nemat Shafik, Deputy Managing Director of the International Monetary Fund, July 12, 2012.