I. Overview
The transition from predominantly socialist ownership and central planning to a market economy
with private ownership is a complex process involving profound changes in the political,
economic, institutional, legal, and social domains. While there may not be a simple unifying theme
to capture this complexity, the quest for economic recovery and sustained growth is certainly an
important common thread for all the transition countries. This paper reviews the record of growth
performance in 25 countries, comprising central and eastern Europe (CEE) and the Baltics,
Russia, and other countries of the former Soviet Union (BRO).
First, it summarizes the emerging consensus of what, conceptually, transition means and, in
particular, of how recovery and growth are expected to come as transition proceeds. A
comparison with growth analysis for market economies highlights the common points and those
unique to transition. Then it presents the basic facts on growth with an elaboration of the main
patterns to be observed. Finally, it assesses the key factors that may explain the differences in
growth performance among transition countries, including how IMF programs and their
implementation in transition countries have been associated with growth performance. Although
complete data are available only through 1997, and the bulk of the study was prepared in
mid-1998, one cannot ignore the dramatic reality of the financial crisis in Russia in August 1998,
with its resulting reversal of growth and spillover to neighboring countries. Thus, the discussion
of growth performance includes preliminary estimates for 1998, and the final conclusions reflect
different interpretations of the Russian crisis and how it informs the lessons drawn by the study on
the determinants of recovery in transition.
While the process of transition may be historically unique, and the period of transformation
still is too short to think of all market economy phenomena as fully relevant, it is nevertheless
useful to begin in Section II with a brief summary of the general (and vast) literature on "new
growth theories." This section also reviews a number of recent studies that attempt to explain
growth in transition countries. A key conclusion is that the medium- to long-term determinants of
growth emphasized in the traditional literature (investment, growth in human capital, and the
resource base) are unlikely to be as important in the early period of transition as policies aimed at
financial stabilization, price liberalization, enterprise financial discipline and restructuring, building
a stable market-oriented institutional environment, and openness to foreign trade.
This analytical framework sets the basis for a closer investigation in Section III of the record
and nature of growth observed so far, which describes the different patterns for groups of
countries, and to what extent underlying resource reallocation, structural shifts, and productivity
improvements have occurred.
Section IV attempts to isolate a small number of key factors that differentiate countries more
successful in recovery from those less successful. Evidence is reviewed here to support various
hypotheses:
- The initial output decline is greatest where reform is bolder, but so too is the subsequent
recovery.
- Early growth is based as much on efficiency improvements as on new investment.
- Financial stabilization is a necessary but not sufficient condition for sustained growth.
- Comprehensive progress on all elements in each broad area of reform is a condition for
sustained growth.
- Initial conditions such as significant overindustrialization can be a deterrent but are
readily offset by stronger efforts on reform.
- Foreign direct investment may contribute to growth, but only if the underlying
conditions favorable to growth are already in place.
- Privatization matters in a broad sense, but it is too early to see definitive evidence of
effects from different types of privatization.
- Countries that perform well on economic growth also exhibit a higher degree of effective
implementation of IMF programs.
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