The Second Transition: Eastern Europe in Perspective

IMF Working Papers, March 1, 2009

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The countries of Eastern Europe achieved "two remarkable transitions in the short period of the last two decades: from plan to market and, then, in the run-up to and entry into the European Union, they rode a wave of global trade and financial market integration."
The paper reaches three conclusions:
- First, "by several metrics, East European and East Asian growth performances were about on par from the mid-1990s; both regions far surpassed Latin American growth."
- Second, "the mechanisms of growth in East Europe and East Asia were, however, very different."
- Third, "the ongoing financial turbulence has, thus far, not had an obviously differential impact on emerging market regions: rather, the hot spots in each region reflect individual country vulnerabilities."

East Europe:
- Relied on a "distinctive—often discredited—model."
- Embraced "financial integration with structural change to compensate for appreciating real exchange rates."
East Asia:
- "Contained further financial integration and maintained steady or depreciating real exchange rates."

The paper poses a central policy and analytical question: "If the East European growth model is distinctive, is it sustainable and replicable?"
It "speculates on the possibilities" regarding sustainability and replicability of the East European model.
The analysis implies policy focus on:
- Monitoring country-specific vulnerabilities that drive regional "hot spots."
- Understanding the interaction between financial integration, structural change, and real exchange rate dynamics in designing supportive policies.

Balance of payments; Current account deficits; Exports; Financial integration; Financial markets; Foreign exchange; Income; International trade; National accounts; Real exchange rates; Transition.

IMF Working Paper: "The Second Transition: Eastern Europe in Perspective" (authors: Daniel Leigh, Stefania Fabrizio, Ashoka Mody), March 1, 2009.