## 3.         Correlates         of         Growth Accelerations

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---

### I. Introduction — scope and key contrasts
- Scope:
  - Documents transformation of ten Central and Eastern European (CEE) countries from planned to market economies and subsequent integration into globalization.
  - Emphasizes two transitions: (i) planned → market systems; (ii) enhanced economic sophistication via globalization.
- Key thesis:
  - CEE countries embraced globalization (trade and financial integration) more fully than other emerging regions, producing rapid convergence but greater vulnerability to global shocks.
- Central policy features of the CEE growth strategy:
  - International financial integration leading to sustained capital inflows (foreign direct investment, bank lending, portfolio flows) and often large current account deficits.
  - Trade openness combined with real exchange rate appreciation; competitiveness maintenance required structural transformation in product quality and composition.
- Comparative per-capita GDP contrasts:
  - CEE average per capita GDP relative to U.S.: "29 percent in 1995, which increased by 12 percentage points to 41 percent in 2007."
  - Latin America: average per capita GDP relative to the United States has "remained below 25 percent since 1995."
  - East Asia: resumed catch-up post-1997-98 crisis and continued gains.

### II. Openness and institutions in the CEEs
- Trade openness:
  - In 1995, trade (exports plus imports) to GDP was less than 100 percent for 5 of the 10 CEE countries; by 2007 only Poland and Romania remained below 100 percent.
  - EU-15 trade-to-GDP: "increased by almost 20 percentage points from just under 60 percent in 1995 to just under 80 percent in 2007."
  - Nine of the 10 CEE countries increased trade-to-GDP ratios "by more than 20 percent"; Estonia experienced a somewhat smaller increase.
- Export market shares and real exchange rates:
  - CEE countries increased world export market shares substantially between 1995 and 2007 even while real exchange rates appreciated.
  - Appreciation partly attributed to Balassa-Samuelson effects and price-level catch-up within Europe.
- Structural transformation of exports (1994–2004):
  - Measured increases in product quality (unit value ratios) and technological content concentrated in "medium-high" technology products; shares of low and medium-low products declined.
  - Unit value ratio (UVR): country unit value divided by world unit value, expressed in logarithm (zero implies parity with world unit value).
  - Latvia and Lithuania in 2004 are "just above the world level" but did not experience significant rises in UVR or high/medium-tech components relative to peers.
- Financial integration:
  - Capital account liberalization and widespread capital inflows/outflows accompanied EU entry.
  - Foreign banks acted as conduits of capital; sovereigns and corporates borrowed internationally at lower spreads.
  - Financial integration metric (sum of external assets and liabilities as percent of GDP) rose from "less than 100 percent in the mid-1990s" to "above 200 percent in a number of countries" by 2007.
  - The increase in financial integration "by about 100 percentage points in many cases" exceeds the 20–40 percentage point increase in trade ratios.
- Institutional development:
  - Strengthening of central banks, treasuries, tax systems, commercial law, and privatization.
  - ICRG composite and subcomponents reported; CEE averages generally higher than other regions but with some subcomponents declining and other regions catching up.
  - Fiscal institutions index (average value, 1991–2004) shown on a 1.5–2.5 scale for new and old EU members.

### III. Emerging market regions in perspective — trade, finance, and exchange rates
- Regional trade openness trends (1995–2007):
  - Emerging Europe and East Asia: trade openness often above 100 percent.
  - Latin America: trade openness closer to "50 percent."
- Export shares and REER (1995–2007):
  - CEE export share: from "just above 1½ percent of world exports in 1995" to "approached 4 percent in 2007."
  - East Asia: increased world market share by "about 3 percentage points by 2007 to almost 20 percent."
  - Latin America: world share remained in a narrow 4–5 percent range.
  - Real exchange rate contrasts:
    - CEE: steady appreciation alongside rising export shares.
    - East Asia: REER trended down (partially reversed since 2004), aiding market share gains.
    - Latin America: REER and export share relatively flat.
- Financial openness and current accounts:
  - CEE financial openness ratio: "increased from about 75 percent in 1995 to about 225 percent in 2007."
  - East Asia: financial openness trended up in the 1990s but halted after the 1997–98 crisis.
  - Capital flow direction differences:
    - Europe: capital flowed from rich to poor countries; CEE economies ran current account deficits reflecting inflows.
    - East Asia: current account surpluses and reserve accumulation (self-insurance).
    - Latin America: tended to pursue self-insurance similar to East Asia.
- Institutional comparisons (ICRG measures, 1995–2007):
  - Aggregate ICRG: CEE led other regions overall though others caught up in recent years.
  - CEE improved most in "democratic accountability."
  - "Law and order" effectiveness declined across regions.

### IV. Growth outcomes — accelerations and comparative performance
- General finding:
  - CEE performance in recent years has been "impressive, but it is about on par with East Asia."
- Definition and identification of accelerations:
  - Focus on rapid accelerations in growth sustained for at least five years; methodology follows Hausmann, Pritchett, and Rodrik (2005).
  - Growth takeoff characterized by both a high level of growth and a substantial acceleration.
  - Growth accelerations defined as episodes in which the real per capita PPP GDP growth rate increases by at least 2 percentage points, and in which growth averages at least 3.5 percent per year over a five-year horizon.
- Policy-relevant tensions and vulnerabilities:
  - CEE strategy combined trade openness, REER appreciation, and reliance on foreign capital—an approach previously discredited in other regions.
  - Benefits: rapid structural transformation, rising product quality, convergence in per capita incomes.
  - Risks: exposure to global financial turbulence, potential for sharp contractions—especially in countries with the most rapid pre-crisis growth; possibility of lasting consequences with prolonged slowdown.
- Comparative mechanisms:
  - East Asia: relatively high savings rates, limited currency appreciation, modest financial integration, current account surpluses and reserve accumulation.
  - CEE: larger reliance on international risk-sharing via capital inflows, acceptance of current account deficits, and faster financial integration.
  - Both regions experienced trade transformation involving export upgrading and product-quality improvements.

### Box 1. Growth Accelerations: Methodology and Data — identification framework and parameters
- Growth-rate notation and change:
  - gt,t+n = ln(yt+n) – ln(yt), i = 1, ... , n.
  - Change in growth rate at time t: Δgt = gt,t+n – gt-n,t.
- Identification criteria (parameters used):
  - N = 5; Z = 3.5; Y = 2; X = 2; W = 3.
  - Criteria for onset:
    - (1) gt,t+n ≥ Z percent per annum.
    - (2) Δgt ≥ Y percent per annum.
  - Criteria for end:
    - (3) gt,t+n ≤ X (growth for the following N-year period dips below X percent per annum);
    - (4) gt+1,t+2 ≤ W (annual growth for the following year dips below W percent per annum).
- Timing window:
  - With N = 5, the earliest and latest years for start of growth acceleration are 1965 and 2002, respectively.
- Regional coverage:
  - Global sample: all countries with peak population > 1 million;
  - CEE;
  - East Asia and Pacific (list provided in source);
  - Latin America (list provided in source).
- Frequency and duration:
  - Global sample average probability = 4 percent per year (implying typical country has about 33 percent chance of a takeoff in a given decade).
  - CEE estimated probability = 7 percent per year.
  - Longevity (average duration): East Asia = 15 years; CEE = 12 years; Latin America = 8 years.
- Data coverage: analysis based on data up to end-2007.

### Correlates of growth accelerations — average changes during first five years (selected)
- Macroeconomic changes (reported values are "Change during first five years"):
  - Investment/GDP: All 1.865***; CEE 3.147**; EAP 3.197***; LAC 2.293***
  - Exports/GDP: All 0.70; CEE 4.26; EAP 4.79; LAC 1.85
  - Imports/GDP: All 1.497; CEE 7.141***; EAP 1.640; LAC 0.73
  - Inflation: All -86.08***; CEE -118.5**; EAP -17.82; LAC -61.92
  - Terms of Trade: All 4.115**; CEE 6.807***; EAP 4.706; LAC 6.954*
  - CA deficit/GDP: All -0.749*; CEE 3.618**; EAP -1.45; LAC -1.21
- Political and institutional indicators:
  - Polity IV: Composite 0.28; CEE 0.963*; EAP -0.260; LAC 0.48
  - Polity IV: Executive Constraints 0.121*; CEE 0.296*; EAP -0.03; LAC 0.313*
  - ICRG: Composite Index 6.626***; CEE 6.262**; EAP 5.682**; LAC 7.900***
  - ICRG: Democratic Accountability 0.405***; CEE 0.594**; EAP -0.21; LAC 0.529***
  - EU Integration Index 0.220***
- Economic liberalization and financial integration:
  - Trade Openness: All 7.485***; CEE 8.360*; EAP 25.21***; LAC 5.053***
  - Financial Openness (de facto): All 27.66***; CEE 33.05***; EAP 1.45; LAC 14.88*
  - Financial Openness (de jure): All 0.228***; CEE 1.165***; EAP 0.15; LAC 0.28
  - Presence of Foreign Banks: All 16.06***; CEE 40.92***; EAP 18.38***; LAC -2.88
  - Private Credit/GDP: All 2.850***; CEE 0.88; EAP 2.51; LAC 2.359**
  - EBRD reform and transition indices: Large scale privatn. 0.975***; Small scale privatn. 0.764***; Enterprise restruct. 0.605***; Price liberalization 0.369***; Trade and forex 0.665***; Competition policy 0.543***; Banking reform 0.765***; Securities markets 0.889***; Overall infrastr. 0.937***
- Significance notation: ***, **, * denote 1, 5, and 10 percent significance levels, respectively.

### Key empirical findings and regional contrasts
- CEE-specific features of growth accelerations:
  - Increases in private investment, declines in inflation, and improvements in terms of trade.
  - Stepped-up imports are more salient in CEE accelerations, consistent with increased current account deficits during accelerations.
  - Significant appreciation in real exchange rate in CEE, contrasting with depreciation during East Asia accelerations.
  - Financial openness and presence of foreign banks more reliably predict growth accelerations in CEE.
  - Increasing democratic accountability and institutional quality play an important role in CEE accelerations.
  - EU integration index is a statistically significant predictor of accelerations beyond standard institutional and liberalization indicators.
- Comparative findings:
  - East Asia: greatest longevity of growth spurts (average 15 years) and strong ability to renew growth.
  - Latin America: persistent lag in trade openness; shorter average spurts (8 years).
  - Global: average probability of acceleration 4 percent per year.

### Traditional growth analysis and role of factors
- Total factor productivity (TFP):
  - TFP growth has played a significantly more important role in the CEE during recent years than in East Asia; in Latin America, TFP has been flat or declined.
- Exogenous and structural contributors:
  - Baltic nations benefited from low initial per capita incomes and relatively low population growth rates within CEE.
  - Policy and institutional development aided CEEs; Baltic countries benefited from small governments, trade openness, advances in education, and institutional development.
  - Central European economies benefited from trade openness and educational/institutional advantages; larger government size pulled growth down in cross-country regressions.
- Role of foreign capital:
  - Access to foreign capital has been a key advantage for CEEs; downward flow of capital associated with more rapid income convergence, with larger gains for lower-income CEEs.

### Financial turbulence: stresses, country episodes, and outlook
- Short-run impact of global financial shock:
  - Current accounts shrinking; growth slowing rapidly; some economies contracting; convergence set back in short run.
  - Risk of breakdown in reinforcing relationship between capital inflows and growth that underpins the CEE model.
- Market differentiation and stress indicators:
  - Median stock-price index relative to peak: fell 66 percent for the CEE, 35 percent for Latin America, and 50 percent for Asian countries in sample.
  - Sovereign bond spreads: limited data suggest spreads increased less for the CEE than for other regions; average spreads in the CEEs still appear low.
  - Figure 11 reports data from January 1 2006 to February 19 2009 (Source: Thomson Financial/Reuters/DataStream).
- Country examples:
  - Hungary: difficulties rolling over public debt; markets focused on chronic budget deficits and rising public debt; sought IMF and international support.
  - Latvia: large current account deficits in 2006 and 2007 well above norms; deficits exceeded sustainable levels.
  - Asian economies (examples): Indonesia and Korea experienced sharp currency depreciation and reserve losses; reserve buffers varied.
- Deleveraging outlook:
  - Deleveraging interacts with weakening global economy creating a financial-accelerator-like process; intensity depends on policy choices and international coordination.
  - Institutional strength developed over past 15 years should provide flexibility and buffers.

### Conclusions and policy-relevant challenges
- Trade openness:
  - Central element of growth across regions; medium-term association strong.
  - Latin America’s lag in trade openness distinguishes its performance.
- CEE experience summary:
  - Achievements: harnessing market forces under rapid globalization alongside open democratic processes; notable push toward financial openness and integration.
  - Replicability concerns: benefits from human capital depth, proximity to product and financial markets, and EU embrace that strengthened institutions.
- Three main challenges going forward:
  - Financial integration risks: prolonged global turbulence may expose vulnerabilities; risk of “sudden stop” with severe output losses for the Baltics and others.
  - Sustaining productivity growth: concern whether past gains (some “easy pickings”) can continue; relentless REER appreciation may undermine competitiveness.
  - Domestic policy and institutional development: need to ensure budgetary priorities and institutional checks and balances keep pace with globalization to preserve public goods and long-term growth.
- Policy implications (implicit):
  - Monitor and manage external imbalances and capital-flow exposures.
  - Strengthen productivity-enhancing reforms and competitiveness to offset real appreciation pressures.
  - Deepen institutional quality, democratic accountability, and fiscal discipline to sustain investor confidence and manage shocks.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp0943.pdf*

### References..............................................................................................................

### _wp0943 - References..............................................................................................................

### Box
- 1. Growth Accelerations: Methodology and Data ...........................................................20

### Figures
- 1(a).     CEE GDP per capita as a percent of EU-15 GDP per capital, 1995-2007 ....................3  
- 1(b).    GDP per capita as a share of US GDP, major emerging market regions, 1995-2007 ...4  
- 2(a).     CEE Trade Openness Trends, 1995-2007......................................................................7  
- 2(b).    CEE World Market Shares and Real Exchange Rate Trends, 1995-2007 .....................8  
- 3. CEE Structural Transformation of Exports, 1994-2004 ................................................9  
- 4. CEE Trends in Financial Integration, 1995-2007 ........................................................10  
- 5. CEE Trends in Institutional Strength, 1995-2007........................................................12  
- 6. Average Value of Fiscal Institutions Index, 1991-2004 ..............................................13  
- 7. Regional Trends in Trade and Financial Openness .....................................................15  
- 8. Regional Trends in Export Shares and Real Effective Exchange Rates, 1995-2007...16  
- 9. Current Account Trends, 1995-2007 ...........................................................................18  
- 10. Regional Trends in Institutional Strengthening, 1995-2007........................................19  
- 11.       Financial       Stress ............................................................................................................28

### Tables
- 1. Growth Acceleration Episodes, by Region ..................................................................21  
- 2. Frequency of Growth Accelerations, by Region..........................................................23

*Source: _wp0943 - References (PDF).*

### 3.         Correlates         of         Growth Accelerations...........................................................

### _wp0943 - 3.         Correlates         of         Growth Accelerations...........................................................

### I. Introduction — scope and key contrasts
- Paper documents transformation of ten Central and Eastern European (CEE) countries from planned economies to market economies and subsequent integration into globalization.
- Two distinct transitions: from planned to market systems, then enhanced economic sophistication via globalization.
- Key thesis: CEE countries embraced globalization (trade and financial integration) more fully than other emerging regions, yielding rapid convergence but raising vulnerability to global shocks.
- Two central policy features of the CEE growth strategy:
  - International financial integration leading to sustained capital inflows (foreign direct investment, bank lending, portfolio flows) and often large current account deficits.
  - Trade openness combined with real exchange rate appreciation; maintaining competitiveness required structural transformation of product quality and composition.
- Comparative regional summary:
  - CEE average per capita GDP relative to U.S.: "29 percent in 1995, which increased by 12 percentage points to 41 percent in 2007."
  - Latin America: average per capita GDP relative to the United States has "remained below 25 percent since 1995."
  - East Asia: resumed catch-up post-1997-98 crisis and continued gains.

### II. Openness and institutions in the CEEs
- Trade openness
  - In 1995, trade (exports plus imports) to GDP was less than 100 percent for 5 of the 10 CEE countries considered; by 2007 only Poland and Romania remained below 100 percent.
  - EU-15 trade-to-GDP: "increased by almost 20 percentage points from just under 60 percent in 1995 to just under 80 percent in 2007."
  - Nine of the 10 CEE countries increased their trade-to-GDP ratios "by more than 20 percent"; Estonia experienced a somewhat smaller increase.
- Export market shares and real exchange rates
  - CEE countries increased world export market shares substantially between 1995 and 2007 even while real exchange rates appreciated.
  - Appreciation partly attributed to Balassa-Samuelson effects and price-level catch-up within Europe.
- Structural transformation of exports (1994–2004)
  - Measured increases in product quality (unit value ratios) and technological content.
  - Changes concentrated in "medium-high" technology products; shares of low and medium-low products declined.
  - Unit value ratio (UVR): country unit value divided by world unit value, expressed in logarithm (zero implies parity with world unit value).
  - Latvia and Lithuania in 2004 are "just above the world level" but did not experience significant rises in UVR or high/medium-tech components relative to peers.
- Financial integration
  - Capital account liberalization and widespread capital inflows/outflows accompanied EU entry.
  - Foreign banks acted as conduits of capital; sovereigns and corporates borrowed internationally at lower spreads.
  - Financial integration metric (sum of external assets and liabilities as percent of GDP) rose from "less than 100 percent in the mid-1990s" to "above 200 percent in a number of countries" by 2007.
  - The increase in financial integration "by about 100 percentage points in many cases" is larger than the 20–40 percentage point increase in trade ratios.
- Institutional development
  - Institutional strengthening accompanied openness (central banks, treasuries, tax systems, commercial law, privatization).
  - ICRG composite and subcomponents reported, with CEE averages generally higher than other regions but with some subcomponents declining and other regions catching up.
  - Fiscal institutions index (average value, 1991–2004) shown on a 1.5–2.5 scale for new and old EU members.

### III. Emerging market regions in perspective — trade, finance, and exchange rates
- Regional trade openness trends (1995–2007)
  - Emerging Europe and East Asia: trade openness often above 100 percent.
  - Latin America: trade openness closer to "50 percent."
- Export shares and REER (1995–2007)
  - CEE export share: from "just above 1½ percent of world exports in 1995" to "approached 4 percent in 2007."
  - East Asia: already large in 1995; increased world market share by "about 3 percentage points by 2007 to almost 20 percent."
  - Latin America: world share remained in a narrow 4–5 percent range over this period.
  - Real exchange rate contrasts:
    - CEE: steady appreciation alongside rising export shares.
    - East Asia: REER trended down (though partially reversed since 2004), aiding market share gains.
    - Latin America: REER and export share relatively flat.
- Financial openness and current accounts
  - CEE financial openness ratio: "increased from about 75 percent in 1995 to about 225 percent in 2007" (three-fold increase).
  - East Asia: financial openness trended up in the 1990s but the trend halted after the 1997–98 crisis.
  - Capital flow direction: in Europe, downhill flow of capital from rich to poor countries; CEE economies ran current account deficits reflecting inflows.
  - East Asian economies ran current account surpluses and accumulated reserves (self-insurance).
  - Latin America tended to be more like East Asia in pursuing self-insurance.
- Institutional comparisons (ICRG measures, 1995–2007)
  - Aggregate ICRG: CEE led other regions overall though others caught up in recent years.
  - CEE led and improved most in "democratic accountability" (others have also caught up).
  - "Law and order" effectiveness declined across regions.

### IV. Growth outcomes — accelerations and comparative performance
- General finding
  - CEE performance in recent years has been "impressive, but it is about on par with East Asia."
- Accelerations (definitions and identification)
  - Focus on rapid accelerations in growth that are sustained for at least five years.
  - Growth acceleration episodes identified broadly consistent with Hausmann, Pritchett, and Rodrik (2005).
  - Box 1 and Table 1 (referenced) detail criteria and identified episodes (text references only; data and tables in source).
- Policy-relevant tensions and vulnerabilities
  - The CEE strategy combined trade openness, real exchange rate appreciation, and reliance on foreign capital—an approach that had previously been discredited in other regions (e.g., Latin America, East Asia crises).
  - Benefits: rapid structural transformation, rising product quality, convergence in per capita incomes.
  - Risks: exposure to global financial turbulence, potential for sharp contractions—especially in countries with the most rapid pre-crisis growth; possibility of lasting consequences with prolonged slowdown.
- Comparative mechanisms
  - East Asia: relatively high savings rates, limited currency appreciation, modest pace of financial integration, current account surpluses and reserve accumulation.
  - CEE: larger reliance on international risk-sharing via capital inflows, acceptance of current account deficits, and faster financial integration.
  - Trade transformation in both CEE and East Asia involved upgrading export structures and product quality.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp0943.pdf*

### Box 1. Growth Accelerations: Methodology and Data

### Box 1. Growth Accelerations: Methodology and Data

### Definition and methodological basis
- Follows the methodology of Hausmann, Pritchett, and Rodrik (2005).
- A growth takeoff is characterized by both a high level of growth and a substantial acceleration in growth.
- Growth accelerations are defined as episodes in which the real per capita PPP GDP growth rate increases by at least 2 percentage points, and in which growth averages at least

*Source: Box 1. Growth Accelerations: Methodology and Data*

### 3.5 percent per year over a five-year horizon.

### _wp0943 - 3.5 percent per year over a five-year horizon.

### Identification framework and parameters
- Growth rate definition:
  - gt,t+n = ln(yt+n) – ln(yt), i = 1, ... , n.
  - Change in growth rate at time t: Δgt = gt,t+n – gt-n,t.
- Identification criteria for onset of growth accelerations:
  - (1) gt,t+n ≥ Z percent per annum (growth is rapid).
  - (2) Δgt ≥ Y percent per annum (growth accelerates).
- Identification criteria for end of acceleration:
  - (3) gt,t+n ≤ X Æ growth for the following N-year period dips below X percent per annum;
  - (4) gt+1,t+2 ≤ W Æ annual growth for the following year dips below W percent per annum.
- Parameters used in the analysis:
  - N = 5; Z = 3.5; Y = 2; X = 2; W = 3.
- Note: Relaxing the thresholds for identifying growth takeoffs produces a larger number of accelerations.
- Timing window:
  - Since N = 5, the earliest and latest years for start of growth acceleration are 1965 and 2002, respectively.
- Regions included:
  - (i) global sample: all countries with a peak population of more than 1 million;
  - (ii) CEE;
  - (iii) East Asia and Pacific (Cambodia, China, Hong Kong SAR, Indonesia, Korea, Lao, Malaysia, Mongolia, Papua New Guinea, Philippines, Singapore, Thailand, and Vietnam);
  - (iv) Latin America (Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, and Venezuela).

### Frequency and duration of growth accelerations
- Average (unconditional) probability:
  - Global sample average probability = 4 percent (implying a typical country would have a chance of about 33 percent of experiencing a growth takeoff in a given decade).
  - CEE estimated probability = 7 percent per year.
- Longevity (average duration) by region:
  - East Asia: averaging 15 years.
  - CEE: averaging 12 years.
  - Latin America: averaging 8 years.
- Table 2 (as reported):
  - All4.091573956
  - CEE6.91210144
  - East Asia Pacific4.41520457
  - Latin America4.3830698
  - Memo items:
    - Middle East North Africa3.5914395
    - South Saharan Africa3.97501270
- Table note: Table reports number of growth episodes divided by number of observations in each region.
- Data coverage: analysis is based on data up to end-2007.

### Correlates of growth accelerations (average change during first five years)
- Macroeconomic circumstances (selected entries from Table 3; "Change during first five years"):
  - Investment/GDP: All 1.865***; CEE 3.147**; EAP 3.197***; LAC 2.293***
  - Exports/GDP: All 0.70; CEE 4.26; EAP 4.79; LAC 1.85
  - Imports/GDP: All 1.497; CEE 7.141***; EAP 1.640; LAC 0.73
  - REER (increase = appreciation): All -3.8621.94***-20.55*0.22
  - Inflation: All -86.08***; CEE -118.5**; EAP -17.82; LAC -61.92
  - Terms of Trade: All 4.115**; CEE 6.807***; EAP 4.706; LAC 6.954*
  - CA deficit/GDP: All -0.749*; CEE 3.618**; EAP -1.45; LAC -1.21
- Political circumstances and institutional indicators:
  - Polity IV: Composite 0.28; CEE 0.963*; EAP -0.260; LAC 0.48
  - Polity IV: Executive Constraints 0.121*; CEE 0.296*; EAP -0.03; LAC 0.313*
  - ICRG: Composite Index 6.626***; CEE 6.262**; EAP 5.682**; LAC 7.900***
  - ICRG: Democratic Accountability 0.405***; CEE 0.594**; EAP -0.21; LAC 0.529***
  - EU Integration Index 0.220***
- Economic liberalization and financial integration:
  - Trade Openness: All 7.485***; CEE 8.360*; EAP 25.21***; LAC 5.053***
  - Financial Openness (de facto): All 27.66***; CEE 33.05***; EAP 1.45; LAC 14.88*
  - Financial Openness (de jure): All 0.228***; CEE 1.165***; EAP 0.15; LAC 0.28
  - Presence of Foreign Banks: All 16.06***; CEE 40.92***; EAP 18.38***; LAC -2.88
  - Private Credit/GDP: All 2.850***; CEE 0.88; EAP 2.51; LAC 2.359**
  - EBRD reform and transition indices (selected): Large scale privatn. 0.975***; Small scale privatn. 0.764***; Enterprise restruct. 0.605***; Price liberalization 0.369***; Trade and forex 0.665***; Competition policy 0.543***; Banking reform 0.765***; Securities markets 0.889***; Overall infrastr. 0.937***
- Significance notation: Statistical significance at the 1, 5, and 10 percent level denoted by ***, **, and *, respectively.
- Table methodology note: The timing of the growth acceleration is taken to be the 3-year period centered on the dates listed in Table 1. A three-year window reduces the risk of narrowly missing the timing of acceleration.

### Key empirical findings and regional contrasts
- CEE growth-acceleration features:
  - Increases in private investment, declines in inflation, and improvements in the terms of trade.
  - Stepped-up imports are more salient in CEE growth accelerations, consistent with increased current account deficits during accelerations.
  - Significant appreciation in real exchange rate within the CEE, contrasting with depreciation during East Asia accelerations.
  - Financial openness and the presence of foreign banks more reliably predict growth accelerations in the CEE.
  - Increasing democratic accountability and institutional quality play a particularly important role in CEE growth accelerations.
  - EU integration (index capturing membership application, negotiation, accession, ERM-II entry, and Euro adoption) is a statistically significant predictor of growth accelerations; regression analysis suggests EU integration has predictive power beyond standard indicators of institutional quality and economic liberalization.
- Comparative findings across regions:
  - East Asia: greatest longevity of growth spurts (average 15 years); strong and persistent ability to renew growth.
  - Latin America: persistent lag in trade openness; trade openness-growth relationship weaker; average spurts shorter (8 years).
  - Global: average probability of acceleration 4 percent per year.

### Traditional growth analysis (interpretation)
- Total factor productivity (TFP):
  - TFP growth has played a significantly more important role in the CEE during recent years than in East Asia; in Latin America, TFP has been flat or tended to decline.
- Exogenous and structural contributors:
  - Baltic nations benefited from low initial per capita incomes (scope for catch up) and relatively low population growth rates across CEE aided per capita income gains.
  - Policy and institutional development helped CEEs; Baltic countries benefited from small governments, trade openness, advances in education, and institutional development.
  - Central European economies benefit from trade openness and educational/institutional advantages, but larger government size pulled growth down in cross-country regressions.
- Role of foreign capital:
  - Access to foreign capital has been a key advantage for CEEs; downward flow of capital associated with more rapid income convergence, with larger gains for lower-income CEEs.

### Financial turbulence: stresses and model test
- Impact of the global financial shock:
  - Current accounts are shrinking; growth is slowing rapidly; some economies contracting; economic convergence will be set back in the short run.
  - Risk of breakdown in reinforcing relationship between capital inflows and growth that underpins the CEE model.
- Market differentiation and stress indicators:
  - Median stock-price index relative to peak: fell 66 percent for the CEE, 35 percent for Latin America, and 50 percent for the Asian countries in sample.
  - Sovereign bond spreads: limited data suggest spreads increased less for the CEE than for other regions; average spreads in the CEEs still appear low.
  - Figure 11 reports data from January 1 2006 to February 19 2009 (Source: Thomson Financial/Reuters/DataStream).
- Country-specific vulnerabilities and episodes:
  - Hungary: difficulties rolling over public debt; markets focused on chronic budget deficits and rising public debt; asked IMF and international community for financial support.
  - Latvia: large current account deficits; deficits in 2006 and 2007 well above norms; financial integration and low per capita income contributed but deficits exceeded sustainable levels.
  - Asia examples: Indonesia and Korea experienced sharp currency depreciation and reserve losses; Asian economies had significant foreign exchange reserves but faced differing degrees of pressure.
- Outlook on deleveraging:
  - Deleveraging interacts with weakening global economy creating a financial-accelerator-like process; intensity depends on the wisdom and international coordination of policies.
  - Strength of institutions developed over past 15 years should provide flexibility and buffers to absorb shocks.

### Conclusions and policy-relevant challenges
- Trade openness:
  - Trade openness stands out as a central element of the growth process across regions; growth and trade openness are strongly associated over medium-term spells.
  - Latin America’s continued lag in trade openness is an important distinguishing feature; tariff reductions helped but non-tariff barriers may have held back dynamics.
- On the CEE experience:
  - CEE achievement: harnessing market forces under rapid globalization alongside commitment to open democratic processes; notable push toward financial openness and integration.
  - Replicability concerns: CEEs benefited from depth of human capital, proximity to thriving product and financial markets, and EU embrace that strengthened institutional structures.
- Three main challenges facing CEEs going forward:
  - Financial integration risks: prolonged global turbulence may expose vulnerabilities; Baltic nations facing severe pullback in growth; risk of “sudden stop” with severe output losses.
  - Sustaining productivity growth: question whether past gains (some “easy pickings”) can continue; concern that relentless real exchange rate appreciation may undermine competitiveness (Blanchard 2006 caution, Portuguese example).
  - Domestic policy and institutional development: need to ensure budgetary priorities and institutional checks and balances keep pace with globalization to preserve public goods and long-term growth.
- Policy implications (implicit from analysis):
  - Monitor and manage external imbalances and capital-flow exposures.
  - Strengthen productivity-enhancing reforms and competitiveness to offset real appreciation pressures.
  - Deepen institutional quality, democratic accountability, and fiscal discipline to sustain investor confidence and manage shocks.

*Source: _wp0943 - 3.5 percent per year over a five-year horizon.*

### References

### _wp0943 - References

### References

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*Source: _wp0943 - References (PDF).*

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