Output Decline in Eastern Europe

Output decline is an artifact of the mismeasurement of real output quantities or the misvaluation of prices. These are statistical causes implicit in the methodologies employed in assembling data series. All components of aggregate demand are under pressure. During times of insecurity, individuals save more and consume less. On the other hand, firms lower production to build down their savings in inventories. A large under-performing investment portfolio cannot be sustained under competitive conditions. Uncertainty and risk-aversity further dampens investment activity. Government net consumption is depressed because of lower tax revenues from administrative mismanagement and a recessionary economy. Faced with a credit crunch, production is lowered. Trade suffers under the deterioration of the external terms-of-trade and the disappearance of traditional export markets. The instantaneous change in the market regime and the swift breakdown of coordination mechanisms outpaces restructuring efforts. Uncertainty, risk-aversity and resistance to change further hampers structural adjustment.

 

Research Paper