Stabilisation, Reform, Initial Conditions and Output Paths in Transition Economies

Abstract

In the early 1990s the countries of Central and Eastern European (CEE), the Baltic States and the other countries of the former Soviet Union (OFSU) abandoned the communist rule and began the transition to a market economy. Several studies empirically analyse the common large output decline at the start of transition, followed by different recovery patterns across countries (see Figure 1). Fisher et al. (1996) fined macroeconomic stabilisation as an important condition for growth to resume. Stabilisation can be thought of as policies aimed at inflation (and fiscal balance) adjustment. De Melo et al. (1997) identifies initial conditions and finds them to be a significant determinant of output performance in the first years of transition. Initial conditions are differences in macroeconomic, institutional and natural resource conditions prevailing at the start of transition. Berg et al. (1999) allows for time-varying effects of these initial conditions. De Melo et al. (1996) constructs a reform indicator (RI) that covers different areas of structural reform. Reform is ‘the process of installing a market economy’ (e.g. price liberalisation, privatisation). They find a significant negative impact of the current level of the reform indicator and a significant positive impact of the lagged level on real output growth.