Preliminary communication

Current account deficit sustainability in selected transition economies

Aleksander Aristovnik

Abstract

The article examines the question of whether the current account deficits seen in
selected transition economies in recent years mainly as a symptom of the dynamic
economic activity of the catching-up process are a source of potential
macroeconomic destabilisation. Given the possible significant reduction of capital
flows, as well as restrictions and lessons from recent financial crises, current
account deficits must be closely monitored in the region. In this respect, the issue of
‘current account sustainability’ in seventeen transition economies is investigated.
For this purpose, two accounting frameworks (Milesi-Ferreti and Razin, 1996;
Reisen, 1998) based on certain strict assumptions are employed. The results show
that if the observed level of foreign direct investment (FDI) flows is kept in the
medium run almost all countries could optimally have a higher level of external
deficit, with the exception of countries such as Baltic States, Hungary, Macedonia,
Moldova and Romania. Accordingly, the maintenance of relatively large FDI
inflows (especially greenfield investments) to national economies is a key priority in
securing future external sustainability. In the end, the results indicate that current
account deficits of transition economies that exceed 5 percent of GDP generally
involve problems of their external sustainability.

Keywords

transition economies; current account deficits; sustainability; FDI

Hrčak ID:

5173

URI

https://hrcak.srce.hr/5173

Publication date:

25.5.2006.

Article data in other languages: croatian

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