Author : Alan Gelb
Release : 1999
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Kind : eBook
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Book Synopsis Circumstance and Choice: The Role of Initial Conditions and Policies in Transition Economies by : Alan Gelb

Download or read book Circumstance and Choice: The Role of Initial Conditions and Policies in Transition Economies written by Alan Gelb. This book was released on 1999. Available in PDF, EPUB and Kindle. Book excerpt: December 1997 Initial conditions and economic policy jointly determine the large differences in economic performance among transition economies in Asia, Central and Eastern Europe, and the former Soviet Union. Initial contions dominate in explaining inflation, but economic liberalization is the most important factor determining differences in growth. But reform policy choices are not exogenous. Liberalization depends, in turn, on both initial conditions and political reform. The experience of countries in transition from a planned to a market-oriented economy has varied greatly. The clearest differences are between the East Asian countries, China and Vietnam, and the countries of Central and Eastern Europe (CEE) and the former Soviet Union (FSU). China and Vietnam have contained inflation and benefited from continued high growth in GDP since the beginning of their reforms, while all CEE and FSU countries have experienced large declines in output, and most have experienced hyperinflation. But even in CEE and the FSU, differences are marked. Some countries have lost over half of their GDP, and growth performance in a number of countries is still poor, while others are growing strongly. Some are still suffering from high inflation while others have successfully reduced annual inflation. What determines this divergence of outcomes across transition countries? No study so far has analyzed the interaction of all factors, including initial conditions, political change, and reforms, in a unified framework including CEE, the FSU, China, and Vietnam. De Melo, Denizer, Gelb, and Tenev examine these broader interactions, but focus first on the role of initial conditions, such as initial macroeconomic distortions and differences in economic structure and institutions, which have been emphasized less in the literature. They find that intial conditions and economic policy jointly determine the large differences in economic performance among the 28 transition economies in the sample. Initiate conditions dominate in explaining inflation, but economic liberalization is the most important factor determining differences in growth. But reform policy choices are not exogenous. They depend, in turn, on both initial conditions and political reform, with political reform the most important determinant of the speed and comprehensiveness of economic liberalization. Other findings provide additional insight into these relationships. Results show that liberalization has a negative contemporaneous impact, but a stronger positive effect on performance over time. The results also show that macroeconomic and structural distortions are negatively related to both policy and performance. Regarding the former, unfavorable initial conditions discourage policy reforms but do not diminish their effectiveness once they are implemented. The authors find some evidence that the influence of initial conditions diminishes over time. This is in part because many of the initial conditions are themselves modified in the course of transition. Monetary overhangs are dissipated through inflation, industrial overhang is eroded as plants shut down, and market memory returns through experience. This paper-a product of the Development Research Group-is part of a larger effort in the group to provide a comparative overview of the experience with the transition from central planning to a market economy.