Institutions Matter in Transition, But So Do Policies
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Institutions Matter in Transition, But So Do Policies OLEH HAVRYLYSHYN1 & RON VAN ROODEN1 International Monetary Fund. E-mail: [email protected] Received 2 August 2002; revised 20 September 2002; accepted 23 September 2002 This paper analyses the importance of developing market-enhancing institutions for restoring economic growth in transition economies during 1991–98. The paper’s main finding is that the development of an institutional framework has indeed a significant positive impact on growth, but that progress in achieving macroeconomic stabilisation and implementing broad-based economic reforms remain the key determinants of growth in transition economies. Comparative Economic Studies (2003) 45, 2–24. doi:10.1057/palgrave.ces.8100005
Keywords: growth, institutions, transition countries, public policy JEL Classifications: P2, P21, P47, O21
‘When I was growing up in Peru, I was told that the farms I visited belonged to farming communities and not to the individual farmers. Yet as I walked from field to field, a different dog would bark. The dogs were ignorant of the prevailing law; all they knew was which land their masters controlled. In the next 150 years those nations whose laws recognize what the dogs already know will be the ones who enjoy the benefits of a modern market economy.’ (Hernando de Soto)
INTRODUCTION: RECENT ANALYSIS ON GROWTH IN TRANSITION At the First Dubrovnik Conference on Transition in 1995, de Melo et al. (1997a) presented a paper analysing patterns of transition, including growth, 1
The authors are staff members of the International Monetary Fund. The views expressed are those of the authors and do not necessarily represent the position or official views of the International Monetary Fund. We are grateful for the comments of John Odling-Smee, Mario Blejer, participants at the Fifth Dubrovnik Conference on Transition Economies, and two referees of this journal.
Oleh Havrylyshyn & Ron van Rooden Institutions Matter in Transition, But So Do Policies
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to that date. Their econometric analysis of growth provided a clear new direction for subsequent efforts to explain recovery and growth in transition, by showing that while inflation stabilisation was a necessary condition, as emphasised by Fischer et al. (1996), an equally important condition was progress on economic liberalisation. In later work, de Melo et al. (1997b) added a detailed analysis of the role of initial conditions. Broadly similar results are obtained in Fischer et al. (1996). The now much larger literature on recovery in transition2 tries to explain growth differences in terms of three main categories of explanatory factors: (i) macroeconomic variables, such as the level of inflation and the size of the budget deficit; (ii) variables describing progress made with structural reforms, in particular liberalisation and privatisation; and (iii) variables characterising initial conditions, such as the degree of macroeconomic and structural distortions at the beginning of transition, or wars and
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