Driving forces of economic growth in the second decade of transition

Abstract

This paper examines driving forces of economic growth in the second transition decade, by testing which determinants from the first decade remain dominant, and which new factors appear in explaining growth. To this end a panel simultaneous equation model is estimated based on a sample of 27 transition countries in the period 1999-2009. According to the main findings of the paper initial conditions do not play a role in determining economic growth in the second decade, but macroeconomic stabilisation and structural reforms still matter. However, in contrast to the first decade, the overall impact of structural reforms is not positive, indicating that difficult progress with reforms in the second decade could slow down economic growth. Moreover, EU membership seems to have the additional effect of slowing down the growth of the accessing countries, meaning that once a transition country becomes an EU member it has a similar growth path to other EU countries in terms of lower growth rates. All this indicates that only countries that undertook fast reforms in the early phase of transition experienced significant benefits from reforms, achieving higher levels of economic development and becoming closer to developed EU countries. Finally, investments and openness of the economy appear as new important determinants of growth.