Effects of the crisis on newly industrialised countries: What development model has been most successful?

The years before the financial crisis were marked by rapid economic growth overall, but especially by the impressive growth of the BRIC states and other newly industrialised countries. In the opinion of Thomas Mirow, President of the European Bank for Reconstruction and Development, London, the development in the countries of Central and Eastern Europe - political and economic integration with Western Europe - was successful up to 2008 and led to massive capital inflows that had a positive effect on growth. Externally financed growth has its price, however, in increasing macroeconomic imbalances and fragile financial sectors. For this reason, many factors must be taken into account in assessing the best development model for the transformation countries and on what action to take. According to the analysis of Gunther Schnabl, University of Leipzig, the catching-up process driven by domestic capital accumulation in the sector of tradable goods is a thing of the past. In Central and Eastern Europe, East Asia, Latin America and raw material exporting countries, growth processes are driven by inflows of capital. This development strategy, which has gained importance since the 1990s with the lowered interest-rate level in the large countries, was the foundation for the impressive rise of the BRIC states and other newly industrialised countries. But it also has its negative side, since the frequency and dimension of crises has increased. This could end up in a flight of volatile capital into the developed capital markets. Now that with near-zero lending rates the monetary-policy leeway is exhausted and with rapidly increasing state indebtedness the financial-policy leeway is vanishing, the limits of the capital-market-based growth model are foreseeable. Michael Knogler, Eastern Europe Institute, Regensburg, examines the long propagated East European catching-up model of export-oriented growth, with a credit-financed technology import as dominant growth strategy. This has meant that the high growth of the new EU-10 countries was dependent from 2002 onwards on flows of foreign investments and credits from western countries. As a result of the financial crisis, western lenders, because of a higher risk aversion, might significantly reduce their investments in Central and Eastern Europe, also in the medium term, so that a reduction of potential growth and a slow-down of the convergence process (or catching-up growth) in the new EU-10 states is probable. Klaus-Jürgen Gern, Institute of the World Economy, Kiel, is of the opinion that the newly industrialised countries, at least a specific group of these countries, will be able to continue the growth path they were on before the crisis. For a stronger disconnection of the newly industrialised countries from the growth in the industrialised countries in the medium term, a strengthening of domestic demand is necessary, particularly in the large newly industrialised countries whose growth has up to now been considerably export oriented.