Defying the Odds: Initial Conditions, Reforms and Growth in the First Decade of Transition

Abstract

This paper investigates the relative importance of three sets of factors - initial conditions, macroeconomic stabilisation and structural reforms - as determinants of growth in transition economies during the first ten years. We ask whether countries that defied the odds, given by their initial conditions and the "typical" time pattern of transition, reaped benefits in terms of higher growth rates. For the period as a whole, we find that initial conditions dominate the impact of reforms. However, a panel data estimation indicates that the effects of initial conditions on growth diminishes steadily over time. Moreover, once we control for differences in starting points, stabilisation measures and time trends, the degree of market liberalisation and privatisation has a robust positive effect on growth. This impact comes with a lag of one year, whereas higher growth feeds back into the level of reform contemporaneously.

Keywords: Transition, initial conditions, structural reforms, stabilisation

JEL Classification: O57, P24