The Global Financial Crisis in Transition Economies: The Role of Initial Conditions

This paper adds to the existing body of literature that explores the effect of the Global Financial Crisis of 2007–2009 on the countries of the former Soviet bloc. It traces differences in the impact of the crisis, as measured by the Country Risk and a newly constructed Cumulative Crisis Index, to the initial conditions. The regression analysis suggests that building a market-based system and opening the economies to the world’s financial system made some transition economies particularly vulnerable to the crisis. The empirical results also indicate that countries with more favorable initial conditions prior to the crisis (greater ethnic homogeneity, lower Country Risk and lower real gross domestic product) and a shorter duration of the socialist regime prior to the transition were more likely to exhibit resiliency during the global downturn.