• March 23rd, 2016

What do we know of the Determinants of Growth in Transition Economies

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For the structure you should build on the following points: initial conditions, structural reforms, and macroeconomic stability. In terms of linking it to a little more theory, I think it would be useful for you to think about what do we know of the determinants of economic growth in transition countries? If the Solow model applies then factor accumulation will lead to growth in the short term, but in the longer term you also need technological change and this was not happening in TE. If Endogenous growth theory applies, then the sectoral imbalance in the economy and the focus on heavy manufacturing and military were unlikely to conduce to long term growth due to waste through spare capacity and absence of spill-over effects. Some elements: 1) Different starting points are important in explaining economic performance and differences in economic growth 2) Initial conditions which represent macroeconomic distortion (see Barro u-shape) 3) Different reforms were conducted to get sustainable growth, from price and trade liberalisation and small-scale privatisation in the early transition phase to corporative governance competition policy and financial sector reforms. Their overall impact on growth was positive in the first transition decade, implying that faster reforms resulted in higher growth rates and faster recovery. However there is also different empirical evidence on their effects in the different phases of transition. 4) Most countries faced high inflation and fiscal deficit in the first years of the transition process, indicating that macroeconomic stability is an important condition for economic recovery and growth in the transition period. When the influence of macroeconomic stability is measured only by inflation, as was done in many studies, then its effect on growth is significant: the lower the inflation, the faster the growth 5) It is well known from the economic growth theories that standard growth factors in the medium and long term are investments in physical and human capital. Following the empirical literature it can be concluded that these factors play no role in explaining economic growth in transition countries, at least in the first years of the transition process. An explanation of this result could be that initially the transition process was not based on increasing new investments, but on reallocation of the existing resources. Despite the relatively high level of investments in the period of central planning, investments in physical capital shrank due to inherited inefficiency and under-utilized capacity. The impact of these traditional factors of input stated by growth models, as well as other types of investments, may become more important during the second transition decade (see Havrylyshin, 2001) 6) What about the effect of EU enlargement on economic growth? These two papers are helpful: Campos and Corecelli (200o) and also Svenjar (2002).

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