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

Author

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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.

Suggested Citation

  • Avanesyan, Vahram & Freinkman, Lev, 2002. "Costing-out the Big Bang: Impact of external shocks on the Armenian economy at the outset of transition," MPRA Paper 10012, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:10012
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    File URL: https://mpra.ub.uni-muenchen.de/10012/1/MPRA_paper_10012.pdf
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    References listed on IDEAS

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    1. David G. Tarr, 2017. "The Terms-of-Trade Effects of Moving to World Prices on Countries of the Former Soviet Union," World Scientific Book Chapters, in: Trade Policies for Development and Transition, chapter 12, pages 271-294, World Scientific Publishing Co. Pte. Ltd..
    2. Ms. Ratna Sahay & Mr. Jeromin Zettelmeyer & Mr. Eduardo Borensztein & Mr. Andrew Berg, 1999. "The Evolution of Output in Transition Economies: Explaining the Differences," IMF Working Papers 1999/073, International Monetary Fund.
    3. Lucjan Orlowski, 1993. "Indirect transfers in trade among former Soviet Union Republics: Sources, patterns and policy responses in the Post‐Soviet period," Europe-Asia Studies, Taylor & Francis Journals, vol. 45(6), pages 1001-1024.
    4. 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.
    5. 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.
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    Citations

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    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 2. Main Report," World Bank Publications - Reports 14429, The World Bank Group.
    3. World Bank, 2003. "Armenia : Poverty Assessment, Volume 1. A Summary of Findings," World Bank Publications - Reports 14544, The World Bank Group.

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    More about this item

    Keywords

    Armenia; costs of transition; USSR collapse; external shock;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • P30 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - General
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe
    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models

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