Do Transition Economies and Developing Countries Have Similar Destinies?

Article excerpt

Introduction

From the very start of the process of transition of ex-communist states to the market system the central question has been whether those countries would enjoy rapid improvements in living standards or would slump into a prolonged stagnation observed in most of the developing world. In other words, are economic conditions in transition economies similar to those in the developing countries where economic growth has been disappointing, or are there fundamental differences that could get transition economies on to a sustainable growth path?

Growth and development textbooks (e.g. Van den Berg 2001) affirm that economic growth can be achieved by either employing more inputs, i.e., factor accumulation, or by improving technology to get more output from a given amount of inputs, i.e., productivity growth. There exists strong theoretical and empirical evidence that expansion of a country's production solely through factor accumulation may lead to growth only in the short-run (see Easterly and Levine 2001). Long-run economic growth, however, is primarily determined by a country's ability to sustain productivity increases (Van den Berg 2001). Gains in productivity may be generated internally or acquired from outside. In the framework developed below, the part of productivity advances attained internally is classified as technological (1) progress, while the rest is referred to as efficiency improvement or "catching up."

This paper estimates productivity growth and its two components identified above for both transition economies and developing countries. The results can help decide whether Stern and Fries (1998, p. 165), who proclaim that "... the transition economies harbor significant growth potential ..." and "... it could be that looking back in 20 years' time some of the world's next 'tiger' economies will have been found in Eastern Europe and the FSU [former Soviet Union]," are overly optimistic. The major purpose of this paper is to determine whether or not the growth potential of transition economies is greater than that of the developing countries.

Although there is a considerable body of literature on transition economies in general, (2) research devoted to comparative evaluation of performance of transition economies vis-a-vis developing countries is virtually nonexistent. Among the few papers in this cohort is the one by Kronenberg (2004, p. 399), who investigates whether "the curse of natural resources (3) ... well-documented ... for developing countries" is also present in transition economies. He finds evidence that this is indeed the case. Weder (2001) examines whether institutional conditions in transition economies are different from those in countries with comparable levels of economic development. Her verdict is that the former are no longer distinguishable from other countries in this respect.

Wagner (1999) draws parallels between transition economies and developing countries on the subject of independence of the central bank and finds that its independence is only de jure, but not de facto in both groups of countries. Campos and Coricelli (2002, pp. 804-805) ask "[h]ow ... gross domestic investment rates of transition economies compare to the average investment rates in countries at similar income levels ..." and report that "their investment rates are indeed low." They also compare structural changes that occurred in economies in transition vis-a-vis those in countries with similar per capita incomes. Finally, they notice that although many social indicators, such as health care, education, and income equality, in the transition group were high at the beginning of reforms relative to those in countries at similar levels of development, these indicators deteriorated dramatically. Cernat and Vranceanu (2002, p. 132) remark that countries of Central and Eastern Europe benefited from going global, and their "experience may provide a useful guide for other developing countries considering a similar move. …