Economic Growth in the Transition Economies – Sustainability and Vulnerability

Abstract

This paper focuses on the growth prospects for the transition economies, in particular the likelihood of the countries achieving high and stable growth in the medium term. For this purpose we consider the growth experience of the transition countries during the second half of the 1990s. After the initial production fall, growth has been disappointingly low and at the same time highly fluctuating in most countries. Using panel data for the period 1995-98, we show that an important factor associated with higher growth is capital inflows. Countries with large current account deficits tend to grow faster than those with smaller deficits. Still, in spite of sizeable external deficits, investment spending has been relatively modest in most transition economies. The implication is that medium-term growth is likely to remain subdued while at the same time vulnerable to financing setbacks. The transition countries must take steps to increase domestic saving if they are to achieve strong and stable growth in the medium term.