What region of the world do you think has suffered the most during the financial crisis? Would you guess the poorest countries of the poorest continents, Asia and Africa? Or, in terms of GDP decline, their richer counterparts in Europe or North America?

The answer, according to a new study by the World Bank, is Eastern Europe and Central Asia. The report compares a 2.2 global GDP slump with more than 5 percent for the region.

The authors note, “The effects of the financial crisis were particularly severe in the region because before the crisis, most of these countries were enjoying large-scale capital inflows,” whether via remittances or foreign investment, which subsequently dried up.

And although the study does not specifically say it, the region seems to be caught right at the point where a financial crisis would do the most damage: much of the relatively poor population did not have savings to fall back on, while the countries had made significant-enough gains in the past decade or so to register truly shocking crashes to their GDP or swelling in the ranks of the jobless.

Across the region, registered unemployment rose by 30 percent in one year. The numbers for the Baltic states, where the report says the costs of firing (presumably severance or other pay-outs) are relatively low, are eye-popping. Unemployment skyrocketed by 151 percent in Estonia from 2008 to 2009, in Lithuania by 136 percent, and in Latvia by 128 percent. Interestingly, joblessness in Kazakhstan and Macedonia, where the government paid subsidies to some businesses to keep workers on, actually declined.

Also interesting are the variances among the countries’ fortunes. Latvia’s GDP shrank by a painful 18 percent in 2009, with Ukraine, Lithuania, Armenia, and Estonia not far behind. On the other end of the scale, Azerbaijan’s GDP expanded by about 9 percent, followed by Uzbekistan, Turkmenistan, and, surprisingly, Kosovo. In most of those cases, the surplus built up from hydrocarbon wealth allowed the governments to pursue stimulus measures instead of cutting spending.

Although, worringly, many households cut back on spending for even essential items like food and health care, only in Latvia did household spending on education drop from 2008 to 2009.

The report offers recommendations for governments to improve their responses to the next crisis, including not trying to dump the burden of social assistance onto local authorities, automating assistance systems, being both more generous and more precise about who should receive unemployment benefits, and making more use of public works programs.

The region has a great deal of catching up to do now. The report notes:

The depth of the crisis has eroded benefits accrued during several years of rapid economic growth and development. … Real GDP has been set back several years — in Latvia, to levels seen four to five years ago; in Ukraine, seen four years ago; and in Turkey and Armenia, three years ago. These development setbacks are comparable to the setbacks caused by the Asian Crisis of 1998, and the Mexican Peso Crisis of 1994–95. The 2009 economic downturn set Russia back by more than its 1998 crisis and affected Turkey by more than its 2001 financial crisis.”

Barbara Frye

Barbara Frye is Transitions Online’s managing editor. Email: barbara.frye@tol.org

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