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The Crisis Hits Home

Summary

The Europe and Central Asia (ECA) region has been hit by a crisis on multiple fronts. Countries in ECA are facing major, interrelated, external macro-financial shocks. The first is the global growth slowdown leading to falling export market demand. In addition, the prospects for inflows of remittances to low-income countries have been downgraded as economic activity in migrant host countries has declined. The second is the financial deleveraging by major banks and other financial institutions in developed economies, which has markedly reduced the availability, and increased the cost, of external finance across public, corporate and financial sectors. The third is the recent commodity price changes, which have involved a reversal of much of the commodity price boom of 2007 and 2008. As a result, countries whose exports are focused on commodities have suffered adverse terms of trade pressures, in addition to the quantity shock to export demand. Across countries in the region, unemployment levels have risen while economic activities have collapsed....
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Full Report [973 KB]
Summary (116 KB)
Overview (267 KB)
Appendix (227 KB)

1. Macroeconomic Shocks

The Europe and Central Asia (ECA) region has been hit by a crisis on multiple fronts. The first is the global growth slowdown leading to falling export market demand. In addition, the prospects for inflows of remittances to low-income countries have been downgraded as economic activity in migrant host countries has declined. The second is the financial deleveraging by major banks and other financial institutions in developed economies, which has markedly reduced the availability, and increased the cost, of external finance across public, corporate, and financial sectors. The third is the recent commodity price changes, which have involved a reversal of much of the commodity price boom of 2007 and 2008.
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2. Household Vulnerabilities

This Chapter examines household vulnerabilities by analyzing how macro shocks discussed in Chapter 1, namely (i) credit market shocks, (ii) external price (food and fuel) shocks, and (iii) income shocks, impact on their well-being. It treats each of these shocks separately and quantifies how the crisis is likely affecting the welfare of households, on average, and, whenever possible and drawing from country-specific examples and illustrations, how such welfare effects may be distributed across households
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3. Coping with the Crisis

The resilience of households to macroeconomic shocks ultimately depends upon the economy's institutional readiness, the flexibility of the economic policy regime, and the ability of the population to adjust. Policy and institutional preparedness is essential so that countries can manage the adverse social impacts of macroeconomic shocks. This requires ex ante analysis of risks, a good understanding of their possible transmission channels if triggered, and their possible impacts on households; developing approaches that ensure that the state does not intervene excessively in terms of detrimental longer-term distortions to incentives or fiscal sustainability; and having a comprehensive social safety net system that provides for countercyclical and scalable interventions.
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Multimedia
Video Interview with Luca Barbone, Sector Director
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