Savings, Investment, and Growth in Eastern Europe

IMF Working Papers, June 1, 1991

Source details

Even modest investment rates may achieve satisfactory rates of growth in the reforming economies of Eastern Europe because their relative capital scarcity implies high rates of productivity for capital.
The most serious obstacle to private investment is uncertainty about the reform process, which can potentially rule out all but the most profitable projects.
This problem sharply increases the payoff from accelerating the structural reform process.
Regarding savings, critical aspects are the changes in methods of financing resulting from economic reform, and the availability of foreign savings, both in the form of loans and foreign direct investment.

Relative capital scarcity in reforming Eastern European economies implies high rates of productivity for capital.
Modest investment rates can still yield satisfactory growth given high marginal product of capital.
Uncertainty about the reform process can eliminate all but the most profitable private investment projects.

Uncertainty about the reform process is identified as the most serious obstacle to private investment.
This uncertainty raises the value of accelerating structural reforms to reduce investment risk and expand feasible projects.

Changes in methods of financing resulting from economic reform are critical to savings behavior.
Availability of foreign savings—both loans and foreign direct investment—is a key element for financing investment during transition.

Accelerate structural reform processes to reduce uncertainty and increase private investment uptake.
Facilitate changes in domestic financing methods accompanying economic reform.
Promote access to foreign savings, including loans and foreign direct investment, to supplement domestic savings.