Post-Crisis Growth and Integration in Europe
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Post-Crisis Growth and Integration in Europe

Catching-up Strategies in CESEE Economies

Edited by Ewald Nowotny, Peter Mooslechner and Doris Ritzberger-Grünwald

Against the backdrop of the financial crisis that unfolded in 2008, this book deals with policy challenges going forward, focusing in particular on the ongoing catching-up process in Central, Eastern and South-Eastern European countries.
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Chapter 21: Capital Inflows, Exports and Growth in the CESEE Region

Jarko Fidrmuc and Reiner Martin


Jarko Fidrmuc and Reiner Martin1 1 INTRODUCTION AND MOTIVATION Most of the countries in Central, Eastern and South-Eastern Europe (CESEE)2 are seen as good examples of the growth-enhancing effect of downhill capital flows, that is, capital flows from relatively capital-rich to relatively capital-poor countries. In addition, they are good examples for an export-led growth strategy, although especially more recent papers on growth in the region often emphasize that growth in the years immediately preceding the recent economic and financial crisis had been too much consumption driven (EBRD, 2010). These two facets of the CESEE region’s recent growth experience – substantial capital inflows and a very strong export performance – are closely interrelated and need to be seen in the context of the region’s gradual EU integration, which culminated in the EU accession of ten CESEE countries in 2004 and 2007. First, a large share of the capital flows into the region originated from the EU. These inflows, in particular inward FDI, arguably helped to build up the capital stock in the CESEE countries, which was expected to facilitate export growth. Second, EU integration provided a major boost for the CESEE exporting industries by opening up a large market at the region’s doorstep. The economic and financial crisis which started in 2007 (or 2008 for most of the CESEE region) had a major impact on these two facets of the CESEE growth model.3 First, capital inflows into the region took a severe hit – although the worst-case scenario of a financial meltdown did...

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