Determinants of Economic Growth in Transition Economies : Do International Trade and Domestic Savings Matter?

This paper presents a modified two-gap model and analyses the impact of international trade and domestic savings on the economic growth in the transition countries. The model indicates that economic growth is constrained by domestic savings when the domestic savings are relatively scarce, whereas it is constrained by the availability of the foreign resources when the export capacity is relatively small. While the implications of the model are on the whole supported by the switching regression results, we yield an unexpected result, namely the negative relation between real GDP growth rate and domestic savings. This can be plausibly interpreted as the adjustment effect of the characteristics inherited from the old system, namely inefficiency in the centrally planned system and the high level of domestic savings. Alternatively, the weak financial intermediation in the transition economies and the prevalent banking crisis in relatively advanced transition countries can reconcile this unexpected relation