Growth in Transition Economies. A review of Literature

The abandonment of central planning led to considerable output declines in countries of the former Soviet-bloc. The magnitude and length of the output declines, as well as recovery experiences have been very diverse. This paper describes and examines the impact of various determinants of output growth, put to the fore in the literature. The central element in the transitional phase is the evolution to a market system. The closer to a market system, the more beneficial effects on growth are expected. Especially government policy -in a wide range of areas- is important in explaining both the time and cross-sectional dimension of output paths during the transitional phase. Government policies can be subdivided in macroeconomic stabilization and structural reform (including the creation of market-enhancing institutions). Macroeconomic stabilization is found to be a necessary, though not sufficient, condition for growth recovery. It is also necessary to put reform into force. This has a contemporary, disruptive effect on growth, but the stock of reform has an offsetting positive effect that starts to dominate at higher levels. Initial conditions are identified as another important determinant of macroeconomic performance at the start of transition. More unfavorable initial conditions lead to larger output declines. However, the effect fades out over time and can be overcome by stabilization and reform policies.