Finding a balance between growth and vulnerability trade-offs : Lessons from emerging Europe and the CIS

This paper examines the growth patterns of emerging Europe and the Commonwealth of Independent States (CIS) countries prior to the global financial crisis. The aim is to draw lessons on what policies can best position these countries going forward to enjoy growth without a buildup in macro and financial vulnerability. Cluster analysis is used to classify these countries across the growth and vulnerability dimensions; namely, a classification into low or high growth outcomes, each of which may occur with low or high vulnerability features. The vulnerability indicators used are multifaceted, covering both the domestic and the external dimensions that have been identified in previous studies as being good indicators of likelihood of crisis-itself understood as multidimensional. Based on multinomial logit regressions, the initial conditions and the economic policies that might affect the probabilities of being in each of the four possible cluster combinations are examined. Many (if not most) of the countries in the sample experienced very large capital inflows relative to their gross domestic product prior to the crisis, which can complicate macroeconomic management and lead to a buildup of vulnerability. These large inflows were partly due to the high liquidity in global markets and, at least for some countries in the country sample, the particular attractiveness of "new Europe and emerging countries in the region" in the eyes of foreign investors. Nonetheless, the analysis finds strong evidence that the macroeconomic and structural policies that over time influence the structure of the economy, can play a significant role in explaining (and, going forward, in influencing) the different growth and vulnerability patterns experienced by the countries covered in this paper