CHARACTERISTICS OF A SUSTAINABLE GROWTH MODEL
What is our understanding of balanced or sustainable growth? It means, first and foremost, that we aim to avoid large business cycle fluctuations as the frequent occurrence of sizable boom-bust cycles is associated with significant economic costs, affecting the long-run growth potential of an economy. Secondly, sustainable growth also implies that economic growth is diversified as much as possible to avoid the economy’s dependence on the performance of a few sectors, which makes the economy more vulnerable in the case of asymmetric shocks. Last but not least, I also want to point out the social dimension of growth: every group in the society should benefit from the growth process such that the build-up of social inequalities and the resulting pressure on political and economic institutions can be contained.
With these considerations of balanced growth in mind, I will briefly look back on the pre-crisis economic developments in the CESEE region in order to have a reference for the intensity of the recession in 2009 and the related adjustment process since then.
Between 2000 and 2007, the CESEE countries - besides China and India - constituted one of the fastest-growing regions in the world (average annual growth of GDP per capita in current prices at purchasing power standard (PPS): 8.2 per cent). This outstanding growth performance was mainly driven by large foreign capital inflows, which fuelled domestic credit growth, led to a surge in asset prices (in particular house prices) and considerably boosted domestic demand.
However, as one can see in Figure 1.1, the sizable gross domestic product (GDP) growth was generated on the back of rising vulnerabilities (see Bakker and Klingen, 2012). Soaring prices and wages were one of the consequences of sharply rising domestic demand. As a matter of fact, double-digit inflation rates were not unusual during the boom years. On top of very strong lending growth in the years preceding the crisis, a large part of domestic loans to households and companies was - and in some countries still is - denominated in foreign currency.
Growing internal imbalances were also reflected by the development of the external sector. Increasing internal demand led to an appreciation of the exchange rates in countries with floating exchange rate regimes, which made exports more expensive and led to the build-up of substantial current account deficits.
Several institutions, including the Oesterreichische Nationalbank (OeNB), pointed out the macrofinancial risks associated with these widening imbalances. However, during the boom years it was admittedly hard to predict whether these developments were actually unsustainable and a threat to growth, or just the outcome of a brisk catching-up process which would eventually reach an equilibrium point. In other words, the borderline between a buoyant convergence process and an overheated economy is a very narrow one - at least for real-time assessments.
In the end the capital inflow-based growth model proved to be unsustainable. As a matter of fact, up to 2008 nobody could imagine, firstly, that advanced economies would be confronted with such a severe recession, and secondly, that a shock originating from Western economies would spill over to such a strong extent to the countries in CESEE. But the accumulated vulnerabilities fully materialized when capital flows into the CESEE countries dropped sharply after the default of Lehman Brothers in September 2008. This situation, combined with the collapse of global trade and limited room for manoeuvre for countercyclical policy measures, led to a deep recession in 2009. It has been widely acknowledged (e.g. by EBRD, 2009; Bakker and Klingen, 2012) that the countries that had the largest imbalances before the crisis were hit hardest afterwards. Figure 1.2 shows that the output loss related to the 2009 recession was extraordinarily large in the Baltics, followed by South-Eastern Europe and Central Europe. It took at least until the end of 2011 to reach the 2008 per capita real GDP levels again.