W_es 1%55
POLICY RESEARCH WORKING PAPER   1855
Stabilization, Adjustment,                                 Except for the Baltics. the
countrfies of the former Sow ie
and Growth Prospects in                                    Union developed and
Transition  Economies                                      implemented reform ,ate 3ri.
more slowly than tUe
countries of Eastern Fmre.
Cevdet Denizer                                             Whv?
The World Bank
Development Research Group
November 1997



I POLICY RESEARCH WORKING PAPER 1855
Summary findings
Political change marked the difference between the             Knowing where to go helped shape reform. The
approaches of the countries of Eastern Europe and the       Eastern European and Baltic countries, wanting to join
former Soviet Union (FSU).                                  the European Union and encouraged to do so, first
The Baltics and most Eastern European countries           initiated political reform, which led to economic reform.
wanted to break away from communism and the FSU             Most FSU countries, not knowing with whom to align,
domination -  so their transition was characterized first   initially saw no choice but the Russian Federation.
by political change. Communists were discredited and           Once reforms are launched, the outcomes are quite
removed from power, creating a period of                    similar. Growth starts about two full years after
"extraordinary politics" and a window of opportunity        stabilization, although it took about a year longer in the
for reform.                                                 FSU. Initial conditions are important to the transition.
The collapse of the FSU did not lead to political           Short to medium-term prospects seem most favorable
change in most FSU states. There were indications of        to Eastern Europe and the Baltics, although they still
discontent with the Union, but except for the Baltics       have to catch up with the OECD countries. If admitted
these were not as strong as in the Eastern European         to the European Union, they may attain high growth
countries and there were no explicit demands for            rates even in the longer term.
independence. The former communists hoped that the            The FSU countries have even more catching up to do.
Commonwealth of Independent States (CIS) set up after         In the short to medium term, countries with slower
the collapse of the FSU would evolve into a loose           population growth rates and strong reform efforts should
federation, maintaining old trade and financial links.      enjoy rapid per capita growth. The Central Asian
Many FSU countries avoided policies different from          countries, with their high population growth rates, need
Russia's. Most political leaders did not initially think that    economic growth rates faster than their population
they would need structural reform policies which could      growth rates. This leaves little room for slowing reform.
diverge from Russian policies. The pace of reform              Given the benefits of integration, there is a strong case
quickened only after the collapse of the ruble zone in the  for Central Asian countries pushing for an economic
FSU in 1993.                                                union, which would also facilitate the restructuring of
their economies.
This paper -a product of the Development Research Group - is part of a larger effort in the group to study the progress
of transition economies. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC
20433. Please contact Emily Khine, room N11-061, telephone 202-473-7471, fax 202-522-3518, Internet address
kkhine@worldbank.org. November 1997. (38 pages)
The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about
development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The
papers carry the names of the authors and should he cited accordingly. The findings, interpretations, and conclusions expressed in this
paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the
countries they represent.
Produced by the Policy Research Dissemination Center



Stabilization, Adjustment and Growth Prospects in
Transition Economies
Cevdet Denizer
Macroeconomics and Growth Division
Policy Research Department
The World Bank






I. INTRODUCTION
It is now almost eight years since the transition from plan to market and from one party to
democratic rule has begun in Eastern Europe (EE), and over five years in the former Soviet Union
(FSU). It is widely agreed that this political and economic transition, affecting about one fourth of
the world's population, has been a unique and historic experience'. In EE political regimes changed
in a very short time ending one party system socialism. In further east, the collapse of the FSU
resulted in fourteen newly independent states. Output declines surpassed expectations and some
countries lost more than half of their GDPs by 1995. Over the course of the transition inflation has
reached thousands of percent, especially in FSU countries, sharply lowering wages and hence living
standards.
The scope and scale of necessary policy reforms to complete the transition have been
unprecedented. Since the entire economic and political edifice has collapsed, the transition required
a "systemic change; liberalization of tightly controlled prices under socialism, freeing of foreign
trade and opening up current and capital accounts, allowing private sector entry, privatization and
enactment of laws for private property ownership, and restructuring of financial systems. However,
the issue was not simply implementing these reforms. As noted by Bruno (1993) the main novelty
in EE and FSU lied in "the revolutionary change in institutions and in the required norms of
economic behavior...", Clearly, this includes, in fact requires, redefining the role of the State, a
major task by itself.
For a review of socialist sytem and some aspects of transition experience in a historical context see Kornai
(1992). For a review of conceptual linkages among reform policies see Kornai (1995), and Blanchard (1997). For a
comprehensive review of the economic issues during transition see Lavigne (1995). Stiglitz(1994) also discusses some
important aspects of transition. Gros and Steinherr(1995) provide a thorough review of transition in EE. Eurpean Bank
for Reconstruction and Developmet (EBRD) provides a review of transition in its annual Transition Report since 1994.
For a comprehensive review of transition, including China's experience, see World Development Report (1996).
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On this front, the EE and FSU countries faced different challenges. While the EE countries
were sovereign states prior to the collapse of socialism, with the exception of Russia and the
Baltics, the FSU states that became sovereign nations after the dissolution of in 1991 faced a
double task: (i) developing an administrative capacity so as to function as a sovereign nation state;
and (ii) creating national economies out of a highly integrated all Union plan based economy and
converting it into a market based one. Hence, it was clear in the beginning that transition in the
FSU would be more problematic.
To this day, the transition has been an uneven process and cross country experience has
varied significantly. Despite early difficulties, some countries have made impressive progress.
Almost all EE countries stabilized their economies and by 1994 most were enjoying growth. In the
FSU, output and inflation performance has been much more variable and transition has been more
difficult as was expected. With the exception of a handful of countries, the majority of the
countries in the FSU delayed reforms or adopted reforms gradually, and they suffered higher output
falls and higher inflation than in EE. Nevertheless, by the beginning of 1995 stabilization efforts
picked up in almost all FSU countries and most managed to control inflation. Structural reforms,
however, with the exception of a few countries, have progressed at a slower pace and growth
performance has not been as strong as in EE.
Against this background, the objective of this paper is twofold. As the discussion above
suggests and noted in the literature, reforms and economic outcomes varied widely across countries
and this gave rise to "transition patterns" in terms of growth and inflation (World Bank). What
accounts for these patterns? Is it largely due to policy variations or inherited initial conditions, or
both? These questions are the focus of the first part of the paper. In the second part, the paper
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considers the growth prospects of transition economies. Since they all suffered from output
declines and improving welfare requires growth, this issue is high on the agenda for all transition
economies. The focus is on the analysis of factors of that could facilitate or hinder growth based on
the findings of the current empirical growth literature.
The limitations of the data used in this paper and in other transition related studies is well
known and are discussed elsewhere2. However, since the focus of the paper is on comparative
patterns broadly rather than precise estimates of various aggregates or their analysis, it is thought
that available data could serve the purpose on hand reasonably well.
II. PERFORMANCE DURING THE TRANSITION
This section provides a review of main macroeconomic aggregates, GDP growth and
inflation rates in the EE and FSU up to 1996. The data organized according to the Cumulative
Liberalization Index (CLI) originally prepared by de Melo, Denizer and Gelb (DDG). The CLI is
annual and covers the period between 1989 - 1995. It is composed of three sub-indices and each
vary between zero, representing a centrally planned economy and one, representing a reformed,
market based economy. These are internal or domestic price liberalization and competition (I);
foreign trade liberalization and current and capital account convertibility (E) and privatization, new
entry regulations and small and large enterprise development (P). Using these three sub-indices and
assigning them weights (0.3, 0.3, and 0.4 respectively) DDG create a cumulative liberalization
index (CLI) for the same time period. In this way, the CLI captures both the intensity and duration
of reforms.
2   For a discussion of the nature of data biases in transition countries see World Development Report (1996).
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Following this exercise, the countries are grouped into reform categories. Countries that
were affected by regional tensions or civil wars, are shown separately. The groupings are arranged
by the following values of the CLI:
Group 1: advanced reformers, CL>4
Group 2: (high) intermediate reformers, 2.7<CLI<4
Group 3: (low) intermediate reformers, 1.7<CLI<2.7
Group 4: slow reformers, CLI<1.7
As shown in table 1, when transition started out, 1989 in EE and late 1991 in FSU, there
was a recession in all countries. This was expected and many analysts pointed this out early in the
transition (Bruno 1991, Fischer and Gelb 1991). What was not expected, however, was the severity
of the declines in output. Initial years of transition saw massive declines in reported GDP, which
reached to an average of 41 percent of GDP by 1995, as noted by Fischer et al (1996). In the case
of FSU, output collapse started in 1992 although in most countries output has been falling since
1989. This was mainly due to the breakdown of the CMEA trading system, and given the
interlinked nature of production structure in the FSU, output falls were simply unavoidable early on
in the process.
Inflation has also increased rapidly initially. This largely reflected the effects of price
liberalization and hence it was a necessary level adjustment towards international prices. However,
continued increases in prices after the initial spurt largely reflected the effects of monetary financing
of deficits. Only three countries in Europe (Czech Republic) managed to contain inflation in double
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digits throughout. In the FSU inflation first increased in 1991 from previous low levels. Starting in
1992, price increases reached record levels, with Armeina and Ukraine recording inflation rates of
10,000 percent in the year of maximum inflation. Every country in FSU, except the Baltics, at one
point experienced inflation rates of more than 1000 percent.
Starting in 1992 growth was turned positive in Poland and by 1994 all advanced reformers
were growing strongly which continued in 1995 and preliminary estimates of output suggest this
trend has contimued in 1996 (EBRD, 1996). As shown table 1 , the cumulative output drop, at
about 20 percent between 1989 and 1994, was the lowest in this group relative to all other
countries included in this study. The next group, high intermediate reformers also started to grow
in 1994 but this group, on average, registered a cumulative output fall of 35 percent in the same
period. On the other hand, with the exception of the Kyrgy Republic, low intermediate reformers
were still registering negative growth in 19953. Moreover, these countries lost half of their output.
Slow reformers seem to have suffered less in terms of output drop but growth was still negative in
1995, and 1996 according to preliminary estimates of GDP in those countries. Not surprisingly,
countries affected by regional conflicts or internal disturbances lost more than half of their output
although some attained relatively high CLI values.
Inflation data, shown in table 2, more or less mirrors the patterns of growth with one major
difference. That is, in every county whrere growth turned positive, this was preceded by a sharp
fall in inflation rates, or stabilization. In fact, as data shows growth returned in EE about two years
after inflation stabilization was achieved. In other s in FSU and Mongolia resumption of growth
took longer, about 3 years after stablization which is a year longer than the EE countries.
3 Output data does not include estimates of the informal sector and hence actual decline is probably lower. See Kaufman and
Kaliberda (1996) for estimates of the unoffical economy in transition economies.
6



These patterns are also visible if fiscal deficits and and base money data are arranged by the
CLI, which are presented in tables 7 and 8. As can be seen, there was almost one to one
relationship between fiscal deficits and base money growth. In the advancded reformers. deficits
are much smaller and the monetary policy is not under pressure to accommodate the deficits. In the
second and third group deficits are larger but base money growth was still under control as
domestic and foreign financing were available which in turn depended upon reforms. The slow
reforming group seem to have lesser deficits than the second and third group but this hides
subsidized central bank lending. As shown by DDG (1996) and reproduced in this paper as table
9, such lending, which is an element of quasi-fiscal deficits, ranged 9-20 percent of GDP in slow
reforrmers and as a result base money growth was rapid.
III. REFORMS, GROWTH AND INFLATION
What lies at the source of this differential reform, output and inflation performance across
countries? It is obvious that one source is the economic policies followed by countries. To explore
the relationship between policies and outcomes, a cross country regression analysis is carried out
similar to DDG (1996). In this framework growth and inflation equations are estimated as
functions of the CLI and some other control variables. Since the other source of cross country
variation could be due to initial conditions (ICs), this paper extends the DDG study including
proxies for ICs into the regression equations.
The other variables included in the regression analysis are the following. In the first
equation, the dependent variable is the GDP growth rate (GR). The CLI is the key variable. A
7



positive relationship would be an indication of the beneficial effects of economic policies or
reforms on growth. Since overindustrialization was one of the features of centrally planned
economies, the share of industry in GDP (IS) was included in the equations. The rationale is that
the more industrialized a country, the disruption of trade and financial flows due to the collapse of
planning would be larger and reduce growth rate during the transition period. In this way the
effects of trade dependence are also captured.
There are two initial condition proxies included in the equations. The first is a dummy
variable for institutional factors (IF). It is given a value of one for the countries which were market
oriented and sovereign states before becoming socialist countries. The idea is to understand the
importance of market memory and administrative capacity during the transition. As noted already
most FSU countries, except the Baltics, were never independent states in their history and this could
be an important determinant of their ability to reform. The second factor considered is the distance,
(DM) from markets. For this purpose, following Murrell (1996) the distance (in miles) from
Vienna is used. The goal is to understand the importance of geographical distance from rich
markets on growth performance. Regional tensions are also captured with a dummy variable (RT).
The following equation is estimated with t ratios in parenthesis:
GR= -3.2 + l.9CLI - 1.2IS - 4.7DM + 3.91F - 9.1RT ......... .. (1)
(-2.8) (3.1) (-2.2)  (-4.2)  (1.9)  (-3.7)
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Adjusted R2: 0.57
For inflation a different specification is proposed. In addition to the CLI, fiscal deficits
(FD) and repressed inflation (RI) are added. Fiscal deficits are consolidated budget deficits of each
country. Repressed inflation is calculated by change in wages less change in GDP. Since only
wage payments were made in cash under central planning, wage rises beyond GDP growth would
mean the accumulation of financial assets by households given shortages of goods. This is also
known as monetary overhang. Hence, the larger the repressed inflation, the larger the price
increases would be.
The estimated equation is:
LogINF = 3.7 - 4.2CLI + 1.2FD + 2.9RINF + 9RT ................ (2)
(2.9) (-2.4)  (4.33)    (1.8)   (2.5)
Adjusted R2: 0.63
According to the results in the first equation, CLI was positively related to growth. The
coefficient of industry confirms our expectation that more developed countries would face larger
declines in their growth rates. Both initial condition variables enter with the expected sign. This
suggest that countries that were not independent states in their history and far from rich markets
suffered more during the transition. This is an important finding as it suggests that initial
9



conditions matter in the transition period and this may have limplications for long run growth
potential of the countries in question. Regional tension variable enters with a negative sign as
anticipated. While the estimated coefficient needs to be interpreted with caution as they only
capture broad relationships between the variables used, the large coefficient of regional tension
variable is suggestive of how much it could add to the decline in the growth rate in addition to other
factors.
Results of the inflation equation are also in line with our apriori expectations.
Comprehensive and sustained reform efforts were negatively related to inflation rates. Smaller
fiscal deficits also reduce inflation although it is significance level is lower than the CLI coefficient.
This is expected because reforms reduce subsidies which in turn reduce fiscal deficits. Repressed
inflation enters with a positive sign which suggests that this variable as expected. Regional tension
(RT) variable has a positive coefficient as expected and highly significant4
Regressions were also run with the individual components of the index. The results show
that this does not change the qualitative conclusions and hence they are not presented . In each case
they are significant and enter with the expected sign. There is a change in the coefficients but this is
relatively small in magnitude.
IV. REFORMS AND STRUCTURAL CHANGE: THE LINKS AND THE PROGRESS
The effects of the intensity and duration of reforms on economic structure can be analyzed
by examining three indicators. The first one is the share of services. Previously, this was a
repressed sector, and with the liberalization of the economy, it was expected that services would
4Controlling for the effects of different reform start dates did not change the results. Hence time profile of inflation and growth
support the results presented in this paper. For a description of the technique how this could be done see DDG (1996).
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expand rapidly. As shown in table 3, this was realized and rapidly refonming economies recording
the largest increases as a percentage in their GDPs. In fact, given the decline in the shares of
industry and agriculture, it seems that the link between growth and reforms were largely driven by
the growth of the services sector.
The other indicator of structural change is the change in the share of private sector in GDP.
It goes without saying that private sector's share was low under socialism. However, again there
were differences across countries. In EE, Poland, for example, had a sizable agricultural sector and
private sector accounted for between 30-40 percent in EE before transition began. In FSU, the
share was quite small averaging about 15-20 percent of GDP at the most. By 1994, about 3 years
after reforms private sector surpassed 50 percent mark in all advanced reformers and by 1996 this
percentage was up by as much as 75 percent in Czech Republic and Albania (figure 1). In FSU,
excluding Baltics, this process has been slower and three years after the collapse of the FSU, or in
1995, private sector share as a whole remained relatively low, about 37 percent on average. Only
Russian Federation had a larger share of private sector than the public sector as of mid-1996. The
Kyrghz Republic was the second after Russia with 50 percent.
Change in employment is also an indication of adjustment and restructuring. While the data
on employment in FSU is particularly problematic, the broad trends can be observed and compared
to the EE countries. As shown in table 4, advanced reformers and high intermediate reformers
differ radically on this measure. Measured unemployment rose steadily between in EE and the
Baltics whereas it remained at negligible levels in the FSU countries. While unofficial data
suggests employment is much higher in FSU as well, the registered unemployment data does not
show this. Since enterprise labor shedding has been much slower in FSU this maybe normal.
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However, it is evident that reallocation of labor has been happening at a more rapid rate in EE than
FSU.
Taken together these patterns suggest the following. First, since service sector growth led
the recovery and this was due to the de novo entry by small and medium firms through new-start
ups and not privatization, it seems that growth came from reallocation of resources and hence
increased efficiency (Gomulka, 1996). Changes in investment ratios point to the same conclusion.
As shown by De Melo et al (1996) investment ratios fell from around 36 percent on average under
socialism to about 20-25 percent range over the course of transition. The fact that many transition
countries are now growing for the last couple of years with these lower investment rates is a clear
indication that investment efficiency is much higher now than before.
The link to reforms seem reasonably straightforward. In reforming countries liberalizing the
economy forced sectors that suffered form structural demand shift due to collapse of communism to
adjust. At the same, since this involved the elimination of subsidies (hard budget constraints), it
permitted new and expanding sectors to obtain resources. This in turn supported growth in new
new and productive sectors and moderated the decline in GDP. Hence, reforming transition
economies required simultaneous implementation of macro and micro policies. Moreover, as the
experience shows, this did not involve a trade off between growth and stabilization5. What policy
choices affected were the time profile of output declines, not their cumulative decline since the
structural demand shift was a permanent event. Given this situation, status quo, or non-reform was
not a policy choice. This also implied that delaying reforms would not improve output performance
and it is in this sense rapid reforms are desirable. Clearly and with the benefit of hindsight, the
5   Bruno and Easterly (1994) and Easterly (1996) show that stabilization programs do not necessarily involve
output losses. In fact, Easterly shows that most stabilization programs are expansionary.
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issue was not fast reform versus gradual reform for growth performance and inflation performance
but one of trade-off between reforms and growth and inflation.
V. ECONOMIC GROWTH POTENTIAL IN THE LONG TERM
Section IH analyzed the determinants of growth during the transition period using cross
country regression equations. The results are indicative of this period and they are literally
transitory findings. Further, as economies move along, the explanatory power of independent
variables used in equation 1 will be diminished. Hence, a longer run growth potential analysis
would require standard growth determinants type of analysis. However, sufficient time has not
passed yet to estimate meaningful long term growth equations for transition economies.
Given this problem, we adopt the approach used by Fischer, Sahay and Vegh (1996), which
relies on the existing cross-country growth determinants found in Barro (1991), and Levine and
Renelt (1992). Fischer et al carry out such analysis for 15 of the 26 transition countries considered
in this study. In this paper, their analysis is extended for all 26 transition economies in EE and
FSU. The basic strategy is to use coefficients estimated by Levine and Renelt (LR) and estimate
growth rates for transition economies as a function of initial conditions and control variables that
condition the long run growth process in the neo-classical models of growth. Our analysis draws on
LR because their analysis includes variables that are shown to be robust in various specifications of
the growth equation.
The long run growth determinants for the 26 countries under study are presented in
table 5. Data sources are given under each variable heading in the same table. The equation used
to estimate future growth rates takes the following form:
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gp(t) = f( Y(O), SSE(O), IN(t), PGR(t))
In this formulation gp(t) is the growth rate of per capita income. Y(O) is the initial per
capita income, SSE(O) is the secondary school enrollment ratio measured as a percentage of the
total secondary school aged population, IN(t) is the ratio of physical investment to GDP, and
PGR(t) is the population growth rate. It is expected that the per capita growth rate, gp, would have a
negative relationship to (YO). This is due to the neoclassical convergence hypothesis which posits
that poorer countries should grow faster than the richer countries holding everything else constant.
SSE is included to capture human capital's impact on growth and it is expected that this variable
would have a positive relationship to gp. As shown in the literature higher investment rates tend to
increase growth rates although the efficiency of investment is also important. PGR is expected to
have a negative relationship with gp.
As shown in table 5, there are large differences across countries in terms of per capita
income. This is even true for the FSU countries which shows the former Union was not successful
in reducing gp differences among its constituents. It is clear that the EE countries and the Baltics
are closer to middle income counties than most of the FSU. Investment levels declined from
previous highs as noted already and as of 1994 averaged around 25 percent of GDP which seems
reasonable. It is however relatively low in Albania, Bulgaria, Croatia, Macedonia, and Poland. On
the other hand they are unrealistically high in Belarus and Turkmenistan which is probably due to
measurement problems.
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As noted by Fischer et al (1996), the most interesting feature of this table is the high
secondary school enrollment ratios. This reflects the importance attached to education under
socialism and should be regarded as a potential source for growth. While this is so, what is
important is to realize that there will be different skill needs under a market based system and all
transition economies will continue to need to invest in human capital.
Population growth rates show a significant degree of variation across countries. The EE
and Baltics have low growth rates while some parts of the FSU, mostly Central Asian countries,
have rates. This suggests higher growth rates for the EE and Baltics and lower for the Central
Asian states.
Using this data and the coefficients of the Levine and Renelt equation, given below, per
capita growth rates could be forecasted.
gp = -0.83 - 0.35Y(1960) - 0.38POP + 3.17SEC + 17.5INV
where Y(1960) refers to the initial level of real per capita income at international prices,
POP is the growth rate of the population, SEC is the secondary school enrollment rate, and INV is
the share of investment in GDP.
The results are also presented in table 5. There are again significant variations among the
countries but on average the forecasted growth rate seems to be around 5 percent. The results are
mostly in line with our expectations. Countries with higher investment in human capital and
physical capital are forecasted to grow faster.
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Using these results, it is not difficult to estimate the number of years it would take these
countries to reach current OECD levels of income per capita. While this exercise maybe more
relevant for the EE and the Baltics, it nevertheless provides some idea how long it may take the
FSU countries if their objective is to enjoy per capita income levels similar to the OECD. The
results are presented in table 6. It is clear that it would take most EE and Baltic countries between
20 and 25 years. Russia and Belarus also fall in this range. On the other hand, given initial
conditions and economic policies it would take most other FSU longer, on average about 45 years.
Given the parameter values in the Levine and Renelt growth equation various simulation
exercises could be performed by changing the variables (levels or growth rates) included in the
study. In this paper, the focus is on investment6. In particular we ask the question: what would be
the impact of raising growth to 30 percent of GDP from its current levels?  The result, also
presented in table 6, show substantial change in long term growth rates, which is expected. In some
cases, the differences are drastic. For example, Armenia's per capita growth rate jumps to 5.8
percent from 2.3 percent which in turn reduces the number of years to converge to OECD levels by
55. This shows the sensitivity of growth rates to changes in investment and is a clear indication that
transition countries should aim to save more and invest more.
VI. POLICY ISSUES AND CONCLUSIONS
6   For the countries that already had investment ratios above 30 percent this exercise was not performed.
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The main findings of this paper are that reforns in transition economies were successful in
reducing inflation and restoring growth. Important as they are, these findings, however, can not
explain the transition experience. The question was how to respond to the advent of transition and
this is where most countries in EE differed from the FSU, with the exception of Baltics. As
explained in the paper, the EE countries rapidly moved with reforms while the FSU countries were
in general, late in developing reform programs and implementing them. But why so?
The crucial difference which largely determined economic policy choices or reform
strategies was the political change. It is no secret that almost all EE countries and the Baltics
wanted to break away from communism and FSU domination, and transition there in was first
characterized by political change. Communists were discredited and removed from power which
gave rise to a "period of extraordinary politics" which provided the window opportunity for
reforms. (Balcerowicz and Gelb, 1994). The collapse of the FSU, onthe other hand, was different.
Vhile there were indications of discontent with the Union, with the exception of the Baltics, these
were not as strong as in the EE countries and there were explicit demands for independence. More
importantly, when the FSU collapsed, this did not lead to a political change in most FSU states.
Given this, rather than reforming quickly, the former communists hoped that the
Commonwealth of Independent States (CIS), which was set up after the collapse of the FSU, would
evolve into a loose federation so that trade and financial links would not disappear. In fact, until the
Russian Federation issued new rubles and forced out other countries out of the ruble zone in late
1993 many countries did not want implement policies that were too different than Russia's. What
political leaders did not realize at the time, however, was the permanent nature of the change which
17



required adjustment. In short, the reform choices were heavily conditioned by the countries' politics
and their perceptions and aspirations.
Most clear evidence is the behavior of Baltics. Sharing very similar production structure
with other FSU states they left the Union early in the process. Following this, they adopted their
currencies and were successful in stabilizing their economies. This is quite telling. All ruble zone
countries had the option of moving out of it but did not do so until late 1993. In fact, there is a
quickening of pace of reforms after the collapse of the ruble zone in the FSU. As this experience
show, knowing where to go has been an important detenninant of reforms. The EE and Baltics,
wanting to join the European Union (EU) and encouraged by it, first initiated political change
which in turn led to reforms. Most FSU countries, not fully knowing whom to align themselves
with initially saw no other country other than the Russian Federation, which in turn heavily
influenced their reforms.
Once reforms are launched, the outcomes are quite similar as this paper showed. Growth
starts about two full years after stabilization although the FSU took about a year longer. This
suggests, initial conditions, which are shown to be important in this paper are relevant factors in
the process of transition.
Longer term prospects seem more favorable for the EE and the Baltics in the short to
medium term. Nevertheless, they still have a catching up to do with the OECD countries as our
results showed. However, if they are admitted to the EU, which seems likely after the year 2000,
they may attain high growth rates even in the longer term. The FSU countries have even more
catching up to do than the EE countries. In the short to medium term countries with slower
population growth rates and strong reform efforts could be expected to enjoy rapid rates of growth
18



per capita. The Central Asian countries have relatively high population rates and this is likely to
affect their per capita growth rates negatively in the short to medium term. What this suggests is
that they need high economic growth rates, exceeding their population growth rates, a clear
indication that there is not much room for slowing reforms. Furhter, given the benefits of
integration, there is a strong case for Central Asian countries to push for an economic union, which
would also facilitate the resructuring of their econornies.
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TABLE 1:
Liberalization, and Growth, 1989-95
CLI                  Annual Outout Growth                 Av growth 93/94 GDP   Lowest level
Group  Countries   1995  1989   1990   1991   1992   1993   1994   1995    93/94   /89 GDP   of GDP189 GDP
Advanced  Slovenia   5.01  -2.70  -4.70   -8.10   -5.40    1.30    5.50    4.00    3.0       84           81
Reformers  Poland     5.03  0.20  -11.60  -7.00    2.60    3.80    6.00    6.50    4.2       88           82
Hungary    5.04  0.70   -3.50  -11.90  -3.00   -0.80    2.90    1.70    0.0       81           80
Czech Rep. 4.54  1.40   -1.20  -14.20  -6.40   -0.90    2.60    4.80    0.8       81           80
Slovakia   4.39  4.50   -0.40  -15.90  -6.70   -4.70   4.80    7.40     0.4       79           77
Averages  4.80  0.82   -4.28  -11.42  -3.78   -0.26   4.36    4.88       1.7      83           80
High  Bulgaria   3.57  -0.50  -9.10  -11.70  -7.30   -2.40    1.40    2.50    -1.4      73           73
Intermediate  Estonia    3.86  -1.10  -3.60  -11.90  -21.60  -8.40    3.00    4.00   0.9       69           67
Refomers  Lithuania   3.58  1.50   -5.00  -13.40   0.00   -18.40   1.00    3.50    -7.3      44           44
Latvia    3.26  3.00   -2.30  -11.10  -35.20  -14.80   2.00    0.40    -4.4       60           59
Romania   3.00  -5.80  -7.40  -12.90  -8.80    1.30    3.90    6.90     2.2       69           67
Albania    3.04  9.80  -10.00  -28.00  -7.20    9.60    9.40    8.60    9.5       74           65
Mongolia   2.94  4.20   -2.00   -9.20   -9.50   -3.00    2.10    6.30   0.6       84           83
Averages   3.32  1.59   -5.63  -14.03  -12.80  -5.16   3.26    4.60     0.03       68          65
Low  Russia     2.61  3.00   -2.00  -12.90  -19.00  -12.00  -15.00  -4.00    -13.5      57           52
Intermediate  Kyrgyzstan  2.63  3.00   4.00   -5.00  -19.30  -16.10  -26.20   1.30    -13.2    61           57
Reformers  Moldova    2.30  8.80   -1.50  -18.00  -29.10  -1.20  -31.20   -3.10    -17.0     53           46
Kazakhstan  1.88  -0.40  -0.40  -18.80  -13.90  -12.00  -25.00  -8.90    -18.5    57           49
Averages   2.36  3.60   0.03   -13.68  -20.33  -10.33  -24.35  -3.68    -15.6      57          51
Slow  Uzbekistan  1.64  3.70   4.30   -0.90  -11.00  -2.40   -3.50   -1.20    -2.5       89           88
Reformers  Belarus    1.55  7.90   -3.20   -1.20   -9.60   -10.70  -19.10  -10.20   -16.6    73           64
Ukraine    1.31  4.10   -3.60  -11.90  -17.00  -13.00  -21.80  -11.40   -18.6     56           48
Turkmenistar 0.85  -7.00  -2.30   -4.80   -5.30  -10.20  -20.00  -13.90   -15.0   69           62
Averages   1.34  2.18   -1.20   -4.70  -10.73  -9.08  -16.10  -9.18    -13.2       72          66
Affected  Croatia    4.83  -1.50  -8.50  -20.90  -9.70   -3.70    0.80   -1.50    -0.7      69          68
by War  FYR Macedo 4.70  0.90   -9.70  -10.70  -21.10  -8.40   -8.20   -3.00    -10.7      57          55
Armenia   2.02  14.20  -7.20  -11.80  -52.30  -14.80   5.30    5.00    -7.4       38           38
Georgia    1.81  -4.80  -12.40  -20.60  -44.80  -25.40  -11.30   -5.00    -24.6   24           23
Azerbaijan  1.47  -4.40  -11.70  -0.70  -22.10  -23.10  -21.10  -13.20   -17.7     50          44
Tajikistan   1.34  -2.90  -1.60   -7.10  -29.00  -11.00  -21.50  -12.50   -26.3   35           30
Averages  2.70  0.25   -8.52  -11.97  -29.83  -14.40  -9.33   -5.03    -14.5      45           34
East  Viet Nam    4.07                                                        8.5       145          100
Asia  China      3.67                                                         11.7      157          100
Averages   3.87                                                         10.1      151          100
Note: CLI = cumulative liberalization index.
Source: De Melo, Denizer, Gelb (1996)
20



TABLE 2:
Inflation Experience by Reform Group, 1989-95
1995                                                            Geometric
Cumul                           Inflation                        average
Group       Countries       Lib Index   1989   1990   1991    1992    1993    1994    1995    89-94
Advanced   Slovenia        5.01      1306.0  549.7  117.7   201.0    32.0    19.8    12.8    213.3
Reformers  Poland           5.03      251.0  586.0   70.3    43.0    35.3    32.2    27.8    117.2
Hungary         5.04       17.0   29.0   34.2    22.9    22.5    19.0    28.2        24.0
Czech Republic   4.54       2.3   10.8   56.7    11.1    20.8    10.2        9.1     17.5
Slovak Republic   4.39      0.0   10.8   61.2    10.1    23.0    14.0        9.9     18.4
Averages        4.80       315.3  237.3   68.0    57.6    26.7    19.0    17.6       78.1
High   Bulgaria        3.57        6.0   22.0  333.5    82.0    72.8    89.0    62.1        79.4
Intermediate  Estonia        3.86         6.1   23.1  210.6  1069.0    89.0    48.0    28.3    125.8
Reformers  Lithuania        3.58        2.1    8.4  224.7  1020.3   390.2    72.0    36.5    164.1
Latvia          3.26        4.7   10.5  124.4   951.2   109.0    36.0    25.1    106.5
Romania         3.00        1.1    5.1  174.5   210.9   256.0   131.0    32.0    105.2
Albania         3.04         0.0    0.0   35.5   225.9    85.0    28.0       7.8     47.9
Mongolia        2.94        0.0    0.0  208.6   321.0   183.0   145.0    56.8    111.7
Averages        3.32         2.9    9.9  187.4   554.3   169.3    78.4    35.5    105.8
Low   Russia          2.61         2.2    5.6   92.7  1353.0   896.0   220.0   190.2    214.3
Intermediate  Kyrgyz Republic   2.63      0.0    3.0   85.0   854.6  1208.7   280.0    42.8    211.0
Reformers  Moldova         2.30         0.0    4.2   98.0  1276.0   789.0   327.0    30.2    220.2
Kazakhstan      1.88        0.0    4.2   91.0  1610.0  1760.0  1980.0   176.3    385.9
Averages        2.36         0.6    4.3   91.7  1273.4  1163.4   701.8   109.9    257.8
Slow   Uzbekistan      1.64        0.7    3.1   82.2   645.0   534.0   746.0   304.6    201.8
Reformers  Belarus          1.55        1.7    4.5   83.5   969.0  1188.0  2200.0   709.0    328.3
Ukraine         1.31        2.0    4.0   91.2  1210.0  4735.0   842.0   376.4    379.2
Turkmenistan    0.85        2.1    4.6  102.5   492.9  3102.0  2400.0  1261.5    366.2
Averages         1.34        1.6    4.1   89.9   829.2  2389.8  1547.0   662.9    318.9
Affected  Croatia         4.83     2520.5  135.6  249.5   938.2  1516.0    98.0        2.0    544.5
by War  FYR Macedonia   4.70      1246.0  120.5  229.7  1925.2   248.0    65.0    17.4    374.3
Armenia         2.02        0.0   10.3  100.0   825.0  3732.0  5458.0   176.8    492.9
Georgia         1.81        0.0    3.3   78.5   913.0  3126.0  18000.0   169.0    591.2
Azerbaijan      1.47         0.0    7.8  105.6   616.0   833.0  1500.0   411.7    265.1
Tajikistan      1.34         0.0    4.0  111.6  1157.0  2195.0   452.0   635.4    289.7
Averages        2.70       627.8   46.9  145.8  1062.4  1941.7  4262.2   235.4    426.3
East  Viet Nam         4.07       76.0   67.5   67.6    17.5       5.2    14.4             38.3
Asia  China            3.67       17.5    1.6    3.0      5.4    13.0    12.0               8.6
Averages        3.87       46.8   34.6   35.3    11.5       9.1    13.2              23.4
Sources: World Bank, IMF and (De Melo, Denizer and Gelb (1996)
21



TABLE 3:
Sectoral Shifts at Constant Prices, 1989-94
Change in share
Cumul                    % of GDP
Group   Countries            Lib Index      Industry   Agrculture      Services
Advanced   Sloveniaw                5.01         -23.3          -3.8          27.1
Reformers  Poland at                5.03          -21.4          -2.0         23.4
Hungary                 5.04          -0.2          -1.7           1.9
Czech Republic          4.54         -10.5          -0.5          11.0
Slovak Republic         4.39         -14.8           0.2          14.6
Averages                 4.8          -14.0          -1.6         15.6
High   Bulgaria                3.57         -10.3           4.3           6.0
Intermediate  Estonia J               3.86         -12.7         -10.1          22.8
Reformers  Lithuania a              3.58          -11.5          2.6           8.9
Latvia a/               3.26         -18.8           1.9          16.9
Romania                 3.00          -6.5           6.2           0.3
Albania                 3.04          -20.1         14.8           5.3
Mongolia                2.94           3.0           4.3          -7.3
Averages                 3.3         -11.0           3.4           7.6
Low   Russia '                 2.61           3.5           6.5         -10.0
Intermediate  Kyrgyz Republic         2.63          -7.8           7.2           0.6
Reformers  Moldova                  2.30           3.5           6.5         -10.0
Kazakhstan              1.88          -6.3          17.5         -11.2
Averages                 2.4           -1.8          9.4          -7.7
Slow   Uzbekistan a'            1.64          -7.6         12.7          -5.1
Reformers  Belarus at               1.55           5.8           -2.8         -3.0
Ukraine                 1.31         -11.2          10.0           1.2
Turkmenistan c'         0.85           -4.5          0.1           4.4
Averages                 1.3          -4.4           5.0          -0.6
Affected   Croatia                4.83           -4.0          0.8           3.2
by War  FYR Macedonia            4.70           9.1          -6.0          -3.1
Armenias                2.02           -6.4          0.0           6.4
Georgia                 1.81          -8.7          18.3          -9.6
Azerbaijan              1.47          -14.8          0.2          14.6
Tajikistan              1.34           n.a.          n.a.          n.a.
Averages                 3.0           -5.0          2.7           2.3
East  Viet Nam                 4.07          -1.1          -6.0           7.1
Asia  China                    3.67          18.6          -6.1         -12.5
Averages                 3.9           8.8          -6.1          -2.7
a/ Change over 1989-93
b/ Change over 1989-92
c/ Change over 1989-91
22



TABLE 4:
Registered Unemployment through Transition
(as percentage of labor force, end of year)
Group  Country            CLI    1989    1990    1991    1992    1993    1994
Advanced   Slovenia a        5.01      2.9     4.7      8.2     11.1    14.5    14.5
Reformers  Poland             5.03     0.1     6.1      11.8    13.6    16.4    16.0
Hungary           5.04     0.3      2.5     8.0     12.3    12.1    10.9
Czech Republic    4.54     0.0      0.8     4.1      2.6      3.5     3.2
Slovakia          4.39     0.0      1.5     11.8    10.4    14.4    14.8
Averages          4.80     0.7      3.1     8.8      10.0    12.2    11.9
High   Bulgaria          3.57     0.0      1.5     11.1    15.3    16.4    12.8
Intermediate  Estonia           3.86     0.0     0.0      0.1      4.8     8.8      8.1
Reformers  Lithuania          3.58     0.0      0.0     0.3      1.3      4.4     3.8
Latvia            3.26     0.0      0.0     0.1      2.1      5.3     6.5
Romania           3.00     0.0      0.0     3.0      8.4     10.2    10.9
Albania           3.04     1.9      7.7     8.6     26.9    28.9    19.5
Averages          3.4      0.3      1.5     3.9      9.8     12.3    10.3
Low   Russia            2.61     0.0      0.0      0.1     0.8      1.1      2.2
Intermediate  Kyrgyzstan       2.63      0.0     0.0      0.0      0.1     0.2      0.7
Reformers  Moldova            2.30     0.0      0.0     0.0      0.7      0.8      1.2
Kazakhstan        1.88     0.0      0.0     0.1      0.5      0.6      1.0
Averages          2.36     0.0      0.0     0.1      0.5      0.7      1.3
Slow   Uzbekistan        1.64     0.0      0.0     0.0      0.1      0.2      0.3
Reformers  Belarus            1.55     1.0      1.0     1.0      0.5      1.5     2.1
Ukraine           1.31     0.0      0.0     0.0      0.3      0.4      0.4
Turkmenistan      0.85     0.0      0.0     0.0      0.0      0.0     n.a.
Averages          1.34     0.3      0.3     0.3      0.2      0.5      0.9
Affected   Croatia          4.83     0.0      9.3     15.5    17.8    17.5    18.0
by War  FYR Macedonia /   4.70      n.a.     n.a.    18.0    19.0    19.0    19.0
Armenia           2.02     1.0      1.0     3.5      3.5      6.2      5.6
Georgia           1.81     0.0      0.0     0.0      5.4      8.4     n.a.
Azerbaijan        1.47     0.0      0.0     0.1      0.2      0.7      0.9
Tajikistan        1.34     0.0      0.0     0.0      0.3      1.1      1.7
23



Group  Country             CLI    1989    1990    1991    1992    1993    1994
Averages          2.70     0.2      1.7     6.2      7.7      8.8      9.0
East  Viet Nam           4.07     n/a      n/a     n/a      n/a      n/a     n/a
Asia  China              3.67     2.6     2.5      2.3      2.3      2.6     2.8
Averages          3.87     n/a      n/a      n/a      n/a     n/a      n/a
Source: De Melo, Denizer, Gelb (1996).
24



TABLE 5:
Levels and Change in Revenue, Expenditures and Fiscal Balance, 1989-94
Changein                     Levels, 1994
Cumul           (% of GDP)                    (% of GDP)
Group   Countries        Lib Index Revenue Expenditure Balance   Revenue Expenditure Balance
Advanced    Slovenia          4.16     4.6       5.8      -1.2      46.6      47.5      -0.9
Reformers   Poland            4.14     6.5       1.5       5.0       47.9      50.4     -2.5
Hungary          4.11     -6.8      -1.7     -5.1       52.3      58.8      -6.5
Czech Republic al  3.61    -10.9    -13.8     2.9       51.2      50.7      0.5
Slovak Republic al  3.53    -11.6   -11.5    -0.1       50.5      53.0      -2.5
Averages         3.91    -3.6       -3.9      0.3       49.7      52.1      -2.4
High   Bulgaria          2.96    -21.9     -17.3     -4.6       38.0      44.1     -6.1
Intermediate   Estonia          2.93    -8.0       -7.5     -0.5      35.0      35.0       0.0
Reformers   Lithuania         2.62    -25.2     -17.1     -8.1       25.1      30.4     -5.3
Latvia           2.39    -15.1     -12.3     -2.8       36.7      38.7     -2.0
Romania          2.35    -18.5      -7.1     -11.4      32.6      35.6      -3.0
Albania           2.30    -20.3     -16.0    -4.3       27.7      41.0     -13.3
Mongolia         2.27    -12.4      -17.3     5.0       36.2      48.0     -11.8
Averages          2.55    -11.3     -13.5     -3.8      33.0      39.0      -5.9
Low    Russia            1.90    -4.5      -4.4      -0.1      36.3      45.1      -8.8
Intermediate   Kyrgyz Republic    1.81    -14.2   -3.7     -10.4      24.3      32.7      -8.4
Reformers   Moldova           1.62    -18.2     -7.8      -7.1       17.1      25.9     -8.8
Kazakhstan        1.31    -21.7     -15.7    -6.0       19.0      23.5      -4.5
Averages          1.66    -14.6     -7.9     -5.9       24.2      31.8      -7.6
Slow    Uzbekistan        1.11     7.8      9.2       -1.4      43.0      45.0      -2.0
Reformers   Belarus           1.07    -1.6       3.4      -1.5       36.6      38.1     -1.5
Ukraine          0.80     15.9      25.7     -8.4       42.3      51.4     -9.1
Turkmenistan      0.63    -26.2     -23.9    -2.3        6.2       7.3      -1.1
Averages          0.90    -1.0      3.6       -3.4      32.0      35.6      -3.4
Affected   Croatia b/       4.02     12.3      8.1       4.1       27.2      27.6      -0.4
by War   FYR Macedonia    3.92      6.6       5.6       1.1       42.8      45.4     -2.6
Armenia           1.44    -15.2     11.2     -21.6      37.0      61.0     -24.0
Georgia           1.32    -16.5     -6.6     -8.1       15.0      24.0      -9.0
Azerbaijan        1.03    10.2      24.7     -11.5      36.0      49.0     -13.0
Tajikistan        0.95    -4.9      -0.5     -1.0       35.4      38.1      -2.7
Averages          2.11    -1.2      7.1       -6.2      32.2      40.9      -8.6
East   Viet Nam          3.42     8.7      -3.2       5.5      24.7       25.2     -0.5
Asia   China             3.08    -5.1      -4.7      -0.4       11.4      13.3     -1.9
Averages          3.25     1.8      -2.2      2.5       18.1      19.3      -1.2
a/ 1989 figures for Czechoslovakia.
bI Change over 1991-94
Soufce: IMF, World Bank, De Melo, Denizer and Gelb (1996).
25



TABLE 6:
Money, Interest Rates and Real Balances
Broad Money
Growth
Cumul   (Average Monthly  Real Money Balances   Discount Rate in Real
Group   Countries       Lib Index  Change 1992-94)       1991=100       Terms, percent (average)
92    93    94    1992-1994  end-1994
Advanced   Slovenia           4.16           5            92   127   164       -3         -1
Reformers  Poland             4.14           3            98   101   104        1          3
Hungary           4.11           2           105   106   102        0         1
Czech Republic i'  3.61          1           106   104   111       -1         -1
Slovak Republic '  3.53          1            95    84    86        -1        -1
Averages          3.91           2            99   104   113        -1         0
High   Bulgaria          2.96           4            91    76    68        -3         0
Intermediate   Estonia f'       2.93           7            25    20    21       n/a        -3
Reformers   Lithuania         2.62           9            30    17    20        n/a       n/a
Latvia            2.39           6            29    28    34       -8         0
Romania!y         2.35           7            63    43    41       -8         12
Albania           2.30           5 bl         82    89   105        -4        2
Mongolia 5'       2.27           6h/          56    36    40       -16        -8
Averages          2.55           6            54    44    47        -8         1
Low   Russia             1.92          15            32    23    16      -17         -2
Intermediate   Kyrgyz Republic    1.81        11            36    16      8      -19        9
Reformers   Moldova           1.62           13           23     9      3      -18         0
Kazakhstan        1.31          19            21    14      8      -31        4
Averages          1.67          15            28    16      9      -21         3
Slow   Uzbekistan         1.11          19           45    53    71       -35        -12
Reformers   Belarus           1.07          20            35    33    17       -34        -5
Ukraine           0.80          22            40    26    13      -29        -40
Turkmenistan      0.63          23            63    73      9      -45       -48
Averages          0.90          21            46    46    28       -36       -26
Affected   Croatia !         4.02          16           68    60    76        -9         2
by War  FYR Macedonia    3.92            19!c          89    91    89        -1         1
Armenia           1.44          24            22     7      2      -33       -26
Georgia           1.32          29            29    24      6      n/a        n/a
Azerbaijan        1.03          17            40    40    19       -40       -52
Tajikistan        0.95          19            39    30    n/a    -30         -16
Averages          2.11          21            48    42    39       -23       -18
East  Viet Nam !         3.42          n/a           97   107    n/a       1         0.6
Asia   China             3.08           2!'         123   141   168       -5         -5
Averages          3.25          n/a          110   124    nla      -2        -2.2
NB: The discount rates in real terms are calculated assuming quarterly compounding. All averages are
simple averages.
a/ Data for 1992 are for the federation.
b/ Broad money growth rate is taken from a quarterly average made monthly by taking a cubic root.
c/ The average discount rate is for 1992-93. For Vietnam, the lending rate for working capital is used.
d/ The rates for 1992-93 are decompounded on monthly basis.
e/ Average interest rate collected over different types of credit.
f/ The NBE credit auction rate is used for end 1994.
g/ The discount rate used is the clearing and settlement account; a mid point of range is used.
Source: De Melo, Denizer and Gelb (1996).
26



TABLE 7:
Fiscal Deficits and Quasi-Fiscal Expenditures for Selected Countries, 1992-94
(as percentage of GDP)
Fiscal Deficits       CB Implicit Subsidya)           Total
1992   1993  1994       1992   1993   1994        1992   1993   1994
Advanced Reformers
Poland   6.8    2.9    2.9       0.0    0.0    0.0         6.8     2.9      2.9
Hungary   5.7    7.0    6.5       0.0    0.0    0.0         5.7     7.0      6.5
Czech Republicb) 0.5   -0.6   -0.5       0.3    0.8    0.1         0.8    0.2    -0.4
Slovakiab) 13.1   7.6    2.5       0.3    1.7    0.0        13.4    9.3      2.5
Intermediate Reformers
Bulgaria   5.0   11.1   6.1       1.3    0.8    0.7         6.3    11.9    6.8
Estonia c) -0.5   1.4    0.0       -      0.2    0.3         -      1.6     0.3
Romania   5.5    1.0    3.0        5.9    3.9    0.0        11.4    4.9      3.0
Russiac)  3.4    8.1    8.8      11.3    1.7    0.0        14.7    9.8      8.8
Kazakhstan   7.3    1.2    4.5       32.7            2.6       40.0             7.1
Slow Reformers
Belarusc)  6.4    9.4    1.5     26.5    9.3    3.4        32.9    18.7    4.9
Turkmenistanc) 10.1   3.6    1.1      12.5   21.2    6.4        22.6   24.8    7.5
Uzbekistanc) 10.2   8.4    2.0      13.1    18.5   19.0       23.3   26.9    21.0
a) Implicit subsidy from the Central Bank to commercial banks and economy due to difference between the Central Bank
refinancing rate and inflation. Annual figures are averages of monthly (quarterly) figures
b) For 1992 the nominal federation subsidy is divided 2 to 1 in favor of the Czech Republic.
c) Calculations done on quarterly basis.
27



Table 8. Forecasting Long-term Trend Growth (Levine-Renelt)
Population Secondary School  Gross      Per Capita Forecasted Forecasted
Growth    Enrollment   Capital Formation  Income  Per Capita   Growth
Rate   (share of school  (share of GDP)   in US$    Growth  Rate
age population  in current prices PPP based   Rate
(WB)      (WB, KZ)      (OECD, WEO)  (WB, IMF)
1. Albania           1.19      0.79            0.17            495   4.08       5.27
2. Azerbaijan        1.28      0.83            0.24           1720   4.83       6.10
3. Bulgaria         -0.35      0.71            0.12           4280   2.16       1.80
4. Croatia           0.06      0.80            0.10           3872   1.99       2.06
5. Czech Republic    -0.06     0.89            0.31           7940   4.66       4.60
6. Estonia          -0.31      0.92            0.30           6634   5.18       4.86
7. Hungary           -0.53     0.81            0.23           7010   3.51       2.98
8. Latvia           -0.53      0.92            0.18           5170   3.63       3.10
9. Macedonia, FYR    1.12      0.80            0.38           1604   7.28       8.40
10. Moldova          0.41      0.81            0.12           2270   2.94       3.35
11. Poland           0.20      0.83            0.16           5480   2.59       2.79
12. Romania          0.19      0.80            0.30           2950   5.80       5.99
13. Russia           0.55      0.92            0.26           4510   4.83       5.38
14. Slovak Republic  0.35      0.96            0.22           6730   3.63       3.98
15. Slovenia         0.41      0.80            0.25           5982   3.78       4.19
16. Armenia          1.40      0.85            0.10           2204   2.31       3.74
17. Belarus          0.20      0.92            0.35           4830   6.44       6.66
18. Georgia         -0.20      0.82            0.32           1354   6.97       6.76
19. Kazakhstan       0.10      0.90            0.24           2946   5.15       5.26
20. Kyrgyz Republic  0.40      0.88            0.30           2358   6.23       6.66
21. Lithuania        0.00      0.78            0.18           3551   3.55       3.55
22. Tajikistan       2.00      0.73            0.22            993   4.28       6.36
23. Turkmenistan     4.60      0.70            0.46           2939   6.66       11.57
24. Ukraine          0.00      0.80            0.35           3149   6.79       6.79
25. Uzbekistan       2.20      0.94            0.23           2293   4.54       6.84
26. Mongolia         1.90      0.78            0.21           2090   3.86       5.84
27. China            1.20      0.55            0.42           2510   6.93       8.21
28. Viet Nam         2.10      0.35            0.24           1040   3.32       5.49
Average              0.26      0.84            0.22           4443   4.06       4.32
Sources: International Monetary Fund (IMF), The World Bank (WB), Organization for Economic Co-operation
and Development (OECD), and Krajnyak and Zettelmeyer (KZ, 1996), and authors estimates.
28



Table 9. Forecasting GDP convergence to OECD countries
Levine-Renelt
Per Capita                                  Investment
Income       At current investment         =30 percent
in US$              rates               (in percent of GDP)
(PPP based)               Number of                Number of
Forecasted    years to   Forecasted   years to
(WB, IMF:1994)  Per Capita  reach current Per Capita   reach current
Growth   OECD levels  Growth       OECD levels
1. Albania              495          4.08         91         6.3            59
2. Azerbaijan           1720          4.83        51         5.96           41
3. Bulgaria             4280          2.16        69         5.31           28
4. Croatia              3872          1.99        80         5.58           29
5. Czech Republic       7940          4.66         19        4.48           19
6. Estonia              6634          5.18        20         5.13           21
7. Hungary              7010          3.51        28         4.74           21
8. Latvia               5170          3.63        36         5.73           23
9. Macedonia, FYR       1604          7.28        35         5.97           42
10. Moldova             2270         2.94         73         6.04           36
11. Poland              5480         2.59         48         5.06          25
12. Romania             2950          5.8         33         5.85           32
13. Russia              4510         4.83         30         5.55          26
14. Slovak Republic     6730         3.63         29         4.98          21
15. Slovenia            5982         3.78         31         4.71          25
16. Armenia             2204         2.31         93         5.81          38
17. Belarus             4830         6.44         22         5.57
18. Georgia             1354         6.97         39         6.62          41
19. Kazakhstan          2946         5.15         37         6.2           31
20. Kyrgyz Republic     2358          6.23        34         6.23           34
21. Lithuania           3551          3.55        47         5.65           30
22. Tajikistan           993         4.28         70         5.63           54
23. Turkmenistan        2939         6.66         29         3.86
24. Ukraine             3149         6.79         27         5.85           31
25. Uzbekistan          2293         4.54         47         5.76           37
26. Mongolia            2090          3.86        58         5.44           41
27. China               2510         6.93         30         4.83
28. Viet Nam            1040          3.32        88         4.37           67
Average for transition  4104         4.06         45         5.43           30
OECD average (1994)     18602     not applicable
29



Figure 1. Change in share of service sector in GDP
16
14
12
10
6
4
2
0 
Advanced                  High Intermediate               Low Intermediate                Low Reformers
Reformers                     Reformers                      Reformers
30



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Policy Research Working Paper Series
Contact
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WPS1828 The Determinants of Banking Crises: Asli DemirguQ-Kunt      September 1997      P. Sintim-Aboagye
Evidence from Developed and       Enrica Detragiache                          38526
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WPS1829 Economic Reform and progress in   Norman Loayza             September 1997      E. Khine
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WPS1830 Private Ownership and Corporate    Roman Frydman            September 1997      B. Moore
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WPS1831 How Trade Patterns and Technology Wolfgang Keller           September 1997     J. Ngaine
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WPS1832 Pension Reform in Bolivia: Innovative Hermann von Gersdorff   September 1997    C. Paviak
Solutions to Common Problems                                                  82099
WPS1833 Cost Recovery and Pricing of       David B. Humphrey        October 1997       T. Ishibe
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Fernando Montes-Negret
WPS1 834 The Comparative Advantage of      Pedro Belli              October 1997        L. Schunk
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WPS1 835 Cost-Benefit Analysis of the Global  Aehyung Kim           October 1997       A. Kim
Dracunculiasis Eradication Campaign Ajay Tandon                              35029
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WPS1836 Health and Labor Productivity: The   Aehyung Kim            October 1997       A. Kim
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Skin Disease                     Asrat Hairu and Others
WPS1837 How Estonia's Economic Transition   Rivo Noorkoiv           October 1997        S. Fallon
Affected Employment and Wages    Peter F. Orazem                              38009
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WPS1838 The Limits and Merits of Participation Paulo Vieira da Cunha    October 1997    E. Thomas
Maria Valeria Junho Pena                    31019
WPS1839 The Effects of Financial Liberalization Cevdet Denizer      November 1997       E. Khine
and New Bank Entry on Market                                                  37471
Structure and Competition in Turkey
WPS1840 Efficient Public Sector Downsizing    Martin Rama           November 1997       S. Fallon
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WPS1841 Patterns of Metropolitan           Gregory K. Ingram        November 1997      J. Ponchamni
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Roads in Countries and Cities    Zhi Liu                                      31052
WPS1843 Externalities and Bailouts: Hard and  David E. Wildasin     November 1997       C. Bernardo
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WPS1845 Employment, Labor Markets, and    Sudharshan Canagarajah  November 1997         B. Casely-Hayford
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Negotiations                     L. Alan Winters                              37947
WPS1847 Outsiders and Regional Trade       Anju Gupta               November 1997      J. Ngaine
Agreements among Small Countries: Maurice Schiff                              37947
The Case of Regional Markets
WPS1848 Regional Integration and Commodity Valeria De Bonis         November 1997      J. Ngaine
Tax Harmonization                                                             37947
WPS1849 Regional Integration and Factor    Valeria De Bonis         November 1997       J. Ngaine
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WPS1 850 Determinants of Intra-Industry Trade Chonira Aturupane     November 1997       J. Ngaine
between East and West Europe     Simeon Djankov                               37947
Bernard Hoekman
WPS1851 Transportation Infrastructure      Eric W. Bond             November 1997       J. Ngaine
Investments and Regional Trade                                                37947
Liberalization
WPS1 852 Leading Indicators of Currency    Graciela Kaminsky        November 1997       S. Lizondo
Crises                           Saul Lizondo                                 85431
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WPS1853 Pension Reform and Private Pension Monika Queisser          November 1997       P. Infante
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WPS1 854 Regulatory Tradeoffs in Designing    Claude Crampes        November 1997      A. Estache
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