The effect of 2007-2009 financial crisis on transition economies

There is an extensive body of economic research that recognizes the beneficial effects of financial liberalization on the economies of the former Soviet bloc.  In general, most economists agree that liberalization of financial systems and their subsequent integration into global markets opened up the transition economies to foreign capital flows and thus stimulated financial development and economic growth.  At the same time, however, financial liberalization and integration promoted greater dependency on exports and capital inflows making these economies more vulnerable to external shocks. The Mexican crisis of 1994, the East Asian crisis of 1997-1998, the Russian crisis of 1998, and the Argentinean crises of 2000 and 2003 had profound differential effects on these countries.  This research explores the reaction of the transition economies to the financial crisis of 2007-2009, the worst global economic slump since the Great Depression.  The crisis that triggered a wave of financial contagion through the advanced countries did not leave the transition economies unscathed. Their responses to the global crisis of 2007-2009, however, were different in magnitude and extent.  This research offers a comparative analysis of the effect of the crisis on 28 countries that used to be part of the Soviet bloc.  The countries are also grouped according to different criteria (EU membership, sovereignty prior to transition, timing of the financial reforms, geography, etc) and the corresponding vulnerability of each group is compared.    The research links the variability in the countries’ and groups’ responses to the differences in macroeconomic stability, financial system soundness, and institutional quality on the onset of the crisis, as well as to the differences in the inherited conditions prior to the transition. The Initial Conditions Index (ICI) is constructed to test the correlations between geographic, political, economic, institutional, and socio/cultural endowments and transition economies’ vulnerabilities to the global financial shock.  The research hopes to illuminate the factors that relate to how well and how poorly the various transition economies fared in their impact from and response to the Great Recession.