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Costing-out the Big Bang: Impact of external shocks on the Armenian economy at the outset of transition

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  • Avanesyan, Vahram
  • Freinkman, Lev

Abstract

This paper explores factors of economic decline in the small republican economies of the former USSR. It develops quantitative estimates of the costs of major transitional shocks for Armenia during the early transition, including the direct impact of terms of trade shock (price shock), direct impact of external demand shock (market loss), direct impact of fiscal shock (loss of transfers), as well as secondary effects of all the above shocks, defined as a further decline in macroeconomic aggregates due to a weakening of the overall domestic demand. These estimates are obtained within a single framework, built on a detailed input-output model for Armenia, and using the actual 1987 data. Our estimates suggest that the cumulative impact of the external shocks of the early 90-s amounted to the equivalent of 85 percent of the pre-transition GDP, and both price and demand shocks were highly significant. At the same time, the fiscal shock was much less important in Armenia due to its lower dependence on transfers from the union budget. The actual economic decline in Armenia in the first part of the 90-s was less severe than the model’s projections. We attribute this difference to a positive impact of market reforms on economic incentives.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10012.

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Date of creation: Dec 2002
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Publication status: Published in Armenian Journal of Public Policy 1.1(2003): pp. 1-34
Handle: RePEc:pra:mprapa:10012

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Keywords: Armenia; costs of transition; USSR collapse; external shock;

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References

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  1. Dani Rodrik, 1992. "Making Sense of the Soviet Trade Shock in Eastern Europe: A Framework and Some Estimates," NBER Working Papers 4112, National Bureau of Economic Research, Inc.
  2. Ratna Sahay & Jeromin Zettelmeyer & Eduardo Borensztein & Andrew Berg, 1999. "The Evolution of Output in Transition Economies," IMF Working Papers 99/73, International Monetary Fund.
  3. Orlowski, Lucjan T., 1993. "Indirect transfers in trade among former Soviet Union Republics: Sources, patterns and policy responses in the post-Soviet period," Kiel Working Papers 556, Kiel Institute for the World Economy.
  4. Tarr David G., 1994. "The Terms-of-Trade Effects of Moving to World Prices on Countries of the Former Soviet Union," Journal of Comparative Economics, Elsevier, vol. 18(1), pages 1-24, February.
  5. Tarr, David G., 1993. "How moving to world prices affects the terms of trade in 15 countries of the former Soviet Union," Policy Research Working Paper Series 1074, The World Bank.
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Cited by:
  1. Freinkman, Lev & Polyakov, Evgeny & Revenco, Carolina, 2003. "Armenia’s trade performance in 1995-2002 and the effect of closed borders: a cross-country perspective," MPRA Paper 10065, University Library of Munich, Germany.
  2. World Bank, 2003. "Armenia : Poverty Assessment, Volume 1. A Summary of Findings," World Bank Other Operational Studies 14544, The World Bank.
  3. World Bank, 2003. "Armenia : Poverty Assessment, Volume 2. Main Report," World Bank Other Operational Studies 14429, The World Bank.

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