Determinants of Growth in Transition Countries

Author:Oleh Havrylyshyn and Thomas Wolf
Position::Former deputy finance minister of Ukraine, is Senior Advisor in the IMF's European II Department/Assistant Director in the IMF's European II Department
SUMMARY

What does transition mean?. Factors behind growth. Further observations on growth. Lessons. What about the political economy?.

 
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    Perhaps the most useful criterion for assessing success in the transition is the sustainable recovery of output, which can be achieved only by controlling inflation and liberalizing markets.

Transition is a dynamic historical process, imposing change on almost every element of society. Assessing the progress of a great number of countries during transition is a complex undertaking in any area, including economics. Success in recovering output, however, readily suggests itself as a useful unifying theme for economic assessment, not least because of the importance policymakers in transition economies attach to output growth and its immediacy for the welfare of everyone in those countries. Based on extensive econometric analysis, this article identifies factors that have inhibited or encouraged the expansion of output and points out several lessons for achieving consistent and sustainable economic growth.

What does transition mean?

In a broad sense, transition implies

* liberalizing economic activity, prices, and market operations, along with reallocating resources to their most efficient use;

* developing indirect, market-oriented instruments for macroeconomic stabilization;

* achieving effective enterprise management and economic efficiency, usually through privatization;

* imposing hard budget constraints, which provides incentives to improve efficiency; and

* establishing an institutional and legal framework to secure property rights, the rule of law, and transparent market-entry regulations.

Factors behind growth

No one pattern characterizes the growth experience of the transition economies. Indeed, substantial differences exist among the countries of Central Europe, the Baltics, and the 12 members of the Commonwealth of Independent States (CIS), although the Baltics share some characteristics with the other two groups, specifically, the deep decline of the CIS and the earlier recovery of Central Europe. It is useful, however, to view the 25 transition countries as falling into several categories: those with consistent growth, those with growth reversals, and those with little or no growth (Charts 1 and 2).

[ SEE THE GRAPHIC AT THE ATTACHED RTF ]

Do the transition economies differ all that much from one another? What elements in their structure and development shed light on their differing rates of growth? Regression analysis done in an underlying study allows us to draw a number of conclusions.

* The three groups differ considerably from one another in growth rates, with the Central European and the Baltic countries showing a solid, steady rate of over 4 percent a year, while CIS countries as a whole, and those countries that have undergone economic reversals, give evidence of much less progress. These uneven growth rates suggest that differences in initial conditions, such as having less distorted economic structures or closer similarities to market...

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