Panel on Growth and Macroeconomic Volatlity Univ. Pompeu Fabra, Barcelona Boris Vujcic

Why are poor countries more vulnerable to shocks? Interaction of many correlated factors –high dependence on few commodities vs. developed countries which are more diversified –technological disadvantages (i.e. in agriculture more developed countries use more machinery, fertilizers, pesticides, irrigation etc. while in manufacturing they use better more complex technologies, more varieties) –lack of financial market development – resource allocation, risk sharing among individuals, refinancing possibilities –high (short-term) debt ratios

Why are poor countries more vulnerable to shocks? –institutional underdevelopment (weak regulatory structures, corruption...) –inadequate macroeconomic policies, i.e. inability to conduct countercyclical fiscal policies, poor monetary/exchange rate management, uncontrolled financial market liberalization (which themselves are not independent of weak institutions) –the effects of trade openness on volatility-growth link appear more ambiguous, but could hardly lead to policy advice to close the economy to trade (opposite to conventional wisdom from growth literature)

Why are poor countries more vulnerable to shocks? typically these factors that make countries more vulnerable to shocks come in bundles found in underdeveloped economies, correlated, like transition indicators (might be nice to have indicators of the sort that EBRD publishes for transition countries for the rest of the developing countries, alongside available vulnerability indicators from crisis and volatility literature) so, to deal with vulnerabilities most often you have to deal with development/growth issues at large

Crises The negative impact on growth is not the effect of small repeated cyclical deviations but of large drops below output trend. The volatility due to crisis and not due to normal times harms the economy's long-run growth performance. Vulnerability to shocks leads to crises of different sorts We know much about crises, but are still not very good at predicting them

What policies to deal with shocks/crises? bottom line, after a long detour through empirical growth (volatility) research and some theory - the volatility literature brings us right back to basic policy issues: how to build institutions, how to sequence reforms, how to handle crisis, political economy of fiscal policy etc. we know that we need to build competent institutions, robust financial and regulatory systems,flexible labor markets, run countercyclical fiscal policies, elliminate corruption, diversify exports, output and tax base, keep debt levels low etc., but it is much less obvious why, in so many cases, it does not happen

What policies to deal with shocks /crises? good deal of growth literature leads us to the history and geography as main explanations why some countries are better able to cope with those issues, while others are not that might be true, but is also a good excuse for policymakers (whoever they are) to be easily accepted a brief example of different ways Croatia has dealt with its recent crises

Croatia - social product per capita (1980=100)

Consumer prices in Croatia (annual inflation) Source: CBS, WIIW and Central bank of Hungary

The degree of dollarization in transition economies Source: Feige, E. (2002)

GDP growth - Croatia

Inflation and exchange rate stabilisation

Banking system by ownership, in % of total assets Source: CNB.

shocks/crises (externally or internally induced) might not be that bad if they result in right policy reaction why policy reaction in 80s was poor, and in 90s good? because of the political change which has enabled institutions for such a reaction therefore, politics is very important (politicians rule the world, not the economists) but, what makes politics change? again history/geography? or do we have a better answer?

–domestically or externally induced, but in both cases they happen exactly because the country is vulnerable to shocks/crisis –at lower levels of development this crises are more likely to be induced by supply/demand shocks like draughts, floods, diseases, TOT shocks in commodity markets –at intermediate levels of development more likely to take some form of BOP/Banking/Currency crisis which can again be induced by adverse supply/demand shocks or/and by poor macroeconomic/regulatory management