Costing-Out the Big Bang: Impact of External Shocks on the Armenian Economy at the Outset of Transition

33 Pages Posted: 27 Feb 2014

See all articles by Vahram Avanesyan

Vahram Avanesyan

AVAG Solutions

Lev Freinkman

National Research University Higher School of Economics; World Bank - The International Bank for Reconstruction and Development (IBRD)

Date Written: December 8, 2002

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.

Keywords: external shocks, Armenia, transition, costs of reforms, price shock

JEL Classification: H20, P22, P33, F40

Suggested Citation

Avanesyan, Vahram and Freinkman, Lev, Costing-Out the Big Bang: Impact of External Shocks on the Armenian Economy at the Outset of Transition (December 8, 2002). Available at SSRN: https://ssrn.com/abstract=2401443 or http://dx.doi.org/10.2139/ssrn.2401443

Vahram Avanesyan

AVAG Solutions ( email )

34, 5 Vardanants Street
Yerevan, 0010
Armenia

Lev Freinkman (Contact Author)

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

World Bank - The International Bank for Reconstruction and Development (IBRD) ( email )

Washington, DC 20433
United States

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