Financial Stability Report No1 20 December 2010 - Banka Qendrore ...

Financial Stability ReportNumber 1however, it seems that negative effects of capital inflows were mainly offset by early growthrecovery. In contrast, those economies that were slow in adopting reform measures andmainly attracted foreign capital into the government debt instruments to finance theirincreasing budget deficits have suffered from balance of payments and financial crises.The choice of fundamental macroeconomic policy in the design of a stabilization programwas even more pronounced in transition economies with special reflection on theimportance of fiscal policy. Fiscal policy in transition economies does not only entail thecontrol over the budget deficit, but also involves the issue of reducing the role of thegovernment in the economy. However, to tackle inflationary pressure was not the only areaof action needed to bring transition economies on the right track of transformation andrestructuring toward market economies. The need for action in transition economies waswidely recognized in six areas (Fisher, Sahay, and Vegh, 1996):- macroeconomic stabilization;- price liberalization;- trade liberalization and current account convertibility;- enterprise reform (especially privatization);- creation of a safety net; and- development of the institutional and legal framework for a market economy,including the creation of a market-based financial system.There were few authors 11 in the 90’especially emphasized the importance of building theinstitutional arrangements, since there is danger of informal institutionalization that fillsthe systemic vacuum. One cannot separate one area of action from the others. However,sound macroeconomic stabilization was necessary for the success of all other reforms, sinceit forced some state enterprises to contract as a consequence of the implementation of hardbudgetconstraints and pushed people into a new private sector. In some respects, economicreforms in transition economies can be compared to reforms introduced in Latin Americancountries (Bruno, 1992). However, the extent of institutional reforms required in transitioneconomies was much greater and demanded the change of fundamental characteristics ofthe institutional legacy of the centrally-planned regime.8.3 Macroeconomic Developments in South-Eastern EuropeAfter twenty years of political turmoil and uncertain economic developments economies ofthe South Eastern Europe 12 are struggling with reaching their growth potential. Beinggeographically far from EU common market if one does take into account that trade flowswith Greece and Bulgaria which are EU member countries are relatively modest, the SEEcountries are mostly left on their own in the process of reinvigorating their economicdevelopment. As it will be shown the thrust of the problem lies in the lack of appropriatedevelopment of the market institutions which mitigates the effects of initial positivemacroeconomic stabilization and microeconomic liberalization.11 Wyplosz (1999) and Kolodko (1999).12 Bulgaria, Macedonia, Kosovo, Serbia, Albania, and Montenegro.| 61