Abstract

The 25 countries of CEE and the BRO4 have been undergoing a process of transition from a centrally planned to a market-oriented economy for the better part of a decade. While this transition has been dependenl in all cases on major changes in the political system, particularly during 1989–91, there have been considerable differences across countries in the speed with which the old system of planning has been dismantled and market-oriented reforms have been introduced. In a few countries, such as Hungary and Poland, a number of market-oriented reforms were well under way long before 1989, and in the former Socialist Federal Republic of Yugoslavia a relatively high degree of market liberalization had existed for some time. In some countries, such as Belarus, Turkmenistan, and Uzbekistan, comprehensive market-oriented reforms have hardly yet begun.

Overview of the Main Growth Patterns

The 25 countries of CEE and the BRO4 have been undergoing a process of transition from a centrally planned to a market-oriented economy for the better part of a decade. While this transition has been dependenl in all cases on major changes in the political system, particularly during 1989–91, there have been considerable differences across countries in the speed with which the old system of planning has been dismantled and market-oriented reforms have been introduced. In a few countries, such as Hungary and Poland, a number of market-oriented reforms were well under way long before 1989, and in the former Socialist Federal Republic of Yugoslavia a relatively high degree of market liberalization had existed for some time. In some countries, such as Belarus, Turkmenistan, and Uzbekistan, comprehensive market-oriented reforms have hardly yet begun.

The year 1989 was probably the last “normal” year for nearly the entire region under the old system. This was the year in which officially measured output peaked in the former Soviet Union, as well as in most other countries in the region; by 1990 significant economic reforms were under way in such key countries as Poland and Hungary; by end-1990 the former German Democratic Republic, one of the linchpins of the former Council for Mutual Economic Assistance (CMEA),5 had merged with the Federal Republic of Germany; and, in part due to each of the foregoing developments, by 1990 the very important CMEA trade system had already been subjected to major shocks (even before the formal breakup of the CMEA mechanism at the beginning of 1991). Of course, partial economic reforms—either formal or informal—were already under way by 1990–91 in the former Soviet Union as well, before its formal dissolution in late 1991. While it is not a simple matter to pinpoint the exact year in which the “transition” began, for purposes of this discussion it is assumed that for each country the last pretransition year is the year in which it experienced the significant social and political changes making possible the beginning of comprehensive market-oriented reform.

Although official data on output are subject to the many problems discussed in Box 1, no better alternative estimates are available on a systematic basis. Therefore, with due qualification for measurement error, official data are used in this study,6

Given the highly distorted production structures, and the sheer waste of resources that characterized the centrally planned economies—together with the particularly long time lag involved in reallocating resources to more efficient uses in a new market context in the transition economies7—it is not surprising that virtually every transition economy experienced a substantial decline in recorded output with the onset of the transition (see Section II). From Table 1 and Figure 1 (upper left panel), however, it is clear that the depth of the decline associated with the beginning of the transition was much greater in the BRO than in the CEE countries. This difference can be attributed to differences in both initial conditions and policies.

First, there was generally a more highly integrated and specialized production structure among the BRO prior to independence, and this, combined in most instances with a greater insulation from the world market, probably meant a greater degree of initial price distortion. Many countries among the BRO were hit particularly hard by a severe terms of trade shock with the transition, as the relative price of imported energy and raw materials rose sharply when the former implicit trade subsidies received from Russia were phased out and only partially and temporarily offset by financial transfers.8 Second, the military-industrial complex was proportionately larger in many of these countries, which led to a greater collapse in output when the transition to a more market-driven, civilian-oriented production structure got under way. Third, in the BRO there was a serious lack, at the outset of transition, of independent national institutions and infrastructures within which a framework for comprehensive reform and stabilization programs could effectively be implemented.

Table 1.

GDP Growth in Transition Economies

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Sources: National authorities; and IMF staff estimates.
Figure 1.
Figure 1.

Growth in Transition Economies1

Sources: National authorities; and IMF staff estimates.1 The country groupings are defined in Box 2, except that there the CEE countries are divided into two groups: central Europe and southeast Europe. Data for the BRO are available only from 1991.2The CEE group comprises 10 countries for the first seven years, but only 7 countries in T(8) and 6 countries in T(9).3The consistent growth group comprises 16 countries for the first seven years, but only 4 countries in T(8) and T(9)

Fourth, in the countries of the Commonwealth of Independent States (CIS) at least, the inertia of 70 years of Soviet political and administrative structures may have explained the early lack of political will and consensus necessary to push ahead boldly with reform and stabilization,9 Finally, in some cases, output declines associated with the transition were also exacerbated by civil conflicts, blockades or sanctions, or both (notably in Armenia, Azerbaijan, Georgia, and Tajikistan among the BRO, and in Croatia and former Yugoslav Republic of Macedonia in CEE); this affected output directly, and also delayed reform. For the countries of CEE as a group (in terms of the unweighted average of these countries’ growth rates), positive growth had begun by 1994 (Figure 1, upper left panel). For the Baltic countries as a group, output began to recover in 1995; for the CIS group, recovery was evident only by 1997–98.

Unofficial Economy and GDP Estimates

Official output statistics in transition economies are subject to several deficiencies, which result in underestimates of the level of GDP and certainly in the level of well-being of the population. The main problems are the omission of “unofficial” economy output, intentional underestimates to avoid taxes, misclassification of state enterprise transactions, and lack of accounting for quality improvements as well as increased consumer choices. Several studies have tried to make corrections for at least some of these factors.

Most difficult technically are efforts to measure physical units of consumption for key goods using survey data. Thus, for example, the IMF’s World Economic Outlook(IMF, 1995) shows that consumption of meat, milk, and bread products in Russia fell far less from 1991 to 1994 than did reported production. But such an approach provides partial coverage at best. More systematic and comprehensive, and technically less complicated, are the adjustments made to official GDP based on electricity consumption, but the comprehensiveness does not mean that this method is superior to the first; in particular, such estimates are sensitive to assumptions about energy intensity. Subject to these shortcomings, the study by Johnson, Kaufmann, and Shleifer (1997) is particularly useful because it estimates the share of the unofficial economy for 17 countries over the period 1989–95. They show 1995 values ranging from 5 to 13 percent in the Slovak Republic, Czech Republic, Poland, and Estonia; a few CEE countries are in the middle range (Bulgaria, 36.2 percent) as are many of the BRO (Latvia, 35.3 percent; Kazakhstan, 34.3 percent; Russia, 41.6 percent); still others have very high values in the range of 50 to 60 percent (Ukraine, Georgia, Azerbaijan). They also show that while this share increases early in the transition, it then begins to decrease as reforms progress and corruption is reduced, although in a few countries that have lagged in reform, the authorities have effectively limited the growth of the shadow economy through various controls and sanctions. Thus, Belarus and Uzbekistan have values of 19.3 and 6.5 percent, respectively.

What conclusions should be drawn for analysis of growth based on official statistics? Clearly, the extent of the decline inoutput is less than the data show—even more so for consumer welfare; nevertheless, all analysts agree there was a sharp decline. In the World Economic Outlook (IMF, 1995) it was shown that, while the adjusted rates of decline are distinctly lower in each of the years 1990–94, the year-to-year trend is very similar. Further, it is not clear that available but differing “estimates” of the unofficial economy provide any greater accuracy in the picture of growth performance. Nevertheless, as Bloem, Cotterell, and Gigantes (1996) conclude in a survey of national accounts in transition, the official data are underestimated and may exaggerate decline, understate growth, and show recovery later than it occurred. However, DeBroeck and Koen’s (1999) thorough review within the IMF of alternative unofficial statistics shows that “official national accounts appear to broadly reflect the main characteristics of the underlying output movements,”

A more appropriate comparison should take into account the differences among countries with respect to the onset of the transition and should consider each country’s performance during the so–called transition time.10 Keeping in mind the earlier caution about being able to pinpoint the beginning of the transition, it is assumed here that for Bulgaria, the Czech Republic, Hungary, Poland, Romania, and the Slovak Republic, the first transition year was 1990. Albania, where political developments moved a bit more slowly, is assumed to have begun the transition in 1991, rather than 1990. Three of the successor states of the former Socialist Federal Republic of Yugoslavia—Croatia, former Yugoslav Republic of Macedonia, and Slovenia—are assumed to have begun their transition in 1992, which was their first full year of independence (and therefore, the year in which more or less independent economic policies became possible). For the BRO, for which the first full year of independence was 1992, this is also considered (again, somewhat arbitrarily) as the first “transition” year.

When growth performance is viewed from this perspective, three broad categories of transition economies can be identified (Box 2 and Tables 2, 3, and 15).11 First, 16 countries, after an average of about three years of output decline, have been growing now for several years–although, as will be explained below, two and possibly three of these countries’ growth may well not be sustainable on the basis of unchanged policies. The three Baltic states have grown at an (unweighted) average annual growth rate during the recovery of 4,7 percent, while the six countries of central Europe (Croatia, the Czech Republic. Hungary, Poland, the Slovak Republic, and Slovenia) have averaged 4.3 percent growth during their recovery periods. Poland stands out by virtue of its relatively early output recovery, a clear rising trend in output growth, and annual economic growth exceeding 4.5 percent for each of the past five years. Growth in each of the Baltic countries has exceeded 3 percent for each of the past three years. Although growth slowed significantly in the Czech Republic in 1997 and output actually declined in 1998, this is viewed by most observers as a temporary phenomenon associated with exchange rate and corporate governance issues, and this country is placed in the “consistent growth” category (see Box 2) despite this small temporary reversal.12

Table 2.

GDP Growth in Transition Economies by Country Group (Transition Time)

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Sources: National authorities; and IMF staff estimates. See Table 15 in Annex V for country details.
Table 3.

Economic Decline and Recovery by Country Group

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Six CIS countries have been consistently growing now for three to four years, and indeed their average annual growth rate during these recovery years is quite high at 5.7 percent. This is a fairly heterogeneous group, however, since rapid growth in Armenia, Azerbaijan, and Georgia has proceeded from a very low base, caused in large part by civil conflict in those countries in the early 1990s. But this growth has also been strongly correlated with macroeconomic stabilization and reform (see Section IV), and it is likely to be sustainable. Although growth in the Kyrgyz Republic has also been associated with strong financial and structural policies, it appears to be more narrowly based (with the gold-mining sector playing a dominant role), and its sustainability is somewhat more open to question. The recent growth of Belarus and Uzebekistan has taken place despite continued high inflation and a fundamental lack of structural reform, and its sustainability is very much open to question in the absence of significant progress toward bringing down inflation and liberalizing the economy (see Box 5). Finally, F.Y.R. Macedonia has been growing now for three years, and at an accelerating rate, and it would now appear to belong in this first category of “consistently growing” countries as well.

A second broad grouping consists of three countries, all located in southeastern Europe (Albania, Bulgaria, and Romania), which began growing three to five years into the transition period but then encountered major output declines in 1996 or 1997 (or in both years). The initial output decline for this group of countries was not as great, on average, as for the other three categories (lower right panel of Figure 1),13 At the same time, and as will be discussed in Section IV, these countries had failed to address some important structural reform issues along the way and were consequently unable to sustain the recovery that had taken place. Only when important structural reforms were initiated, and programs of macroeconomic stabilization renewed, did two of these countries (Albania and Bulgaria) recover again in 1998, whereas output in Romania continued to decline. The average annual rate of growth of these three countries since their initial recovery is only 1.4 percent.

Country Groups by Growth Performance and Region1

The growth performance of the 25 transition countries can be differentiated by both region and the rapidity with which output recovered and the consistency of this recovery.

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Mongolia is not included in this study.

A third broad grouping is composed of six CIS countries that thus far, after eight years of transition, have shown little or no growth. As a group, since their initial recovery, these countries have grown at an average annual rate of 0.5 percent. Tajikistan, after the second largest cumulative output decline among the 25 transition economies—due largely to civil conflict—actually grew in both 1997 and 1998, and at an accelerated rate. Kazakhstan, which began to recover in 1996–97, experienced a fall in output in 1998, although this was at least partly due to the decline in the world price for oil and the crisis in neighboring Russia. Both Moldova and Russia showed signs of recovery in 1997. only to see output decline sharply in 1998, in large part owing to the crisis in Russia itself. After years of decline, Turkmenistan managed to grow in 1998, but output in Ukraine continued to fall, although at the lowest rate during the whole transition.

As of 1998, only three countries had reattained or surpassed their measured output levels in the first year preceding their transition.14 Each of these was in central Europe, with real GDP in 1998 in Poland and Slovenia exceeding that of the year immediately prior to the beginning of transition by 17 percent and 20 percent, respectively, and output in Croatia surpassing the immediate pretransition level by 6 percent. At the other extreme, with measured output still less than one-half the immediate pretransition level, were five CIS countries. One of these, Georgia (47 percent of 1991 output), has actually been growing for four straight years. The other four are all in the third grouping (little or no growth): Tajikistan and Turkmenistan (around 45 percent of the 1991 level), Moldova (40 percent), and Ukraine (41 percent).

Finally, it should be emphasized that the growth rates for most transition economies in 1998 were negatively affected by some factors well beyond their control or by the process of transformation itself. For CEE countries, the general slowdown in the world economy and diminished export prospects, together with contagion effects for most emerging economies, undoubtedly had a negative influence on economic growth. For the BRO, not only these factors, but more important—for those countries deeply dependent on Russia (either directly or indirectly through their trade ties in the BRO)—the Russian crisis had a profound impact on economic growth in 1998 and could continue to adversely affect their recovery in 1999.

Resource Reallocation, Productivity, and Demand

As discussed in Section II, the hallmarks of the transition from central planning to a market economy are liberalization and the imposition of hard budget constraints. Liberalization includes the freeing of prices and of resource allocation. In effect, enterprise managers are now given the freedom to procure and allocate resources in accordance with changing price signals, the latter reflecting underlying shifts in demand as well as in supply as enterprises are faced with both liberalized prices and hard budget constraints. Since liberalization (especially of prices) can occur virtually overnight, but resource reallocation takes time, some initial decline in output is likely but its extent will depend on several factors, including the degree to which prices and production in the centrally planned economy were initially distorted by way of price controls, and the extent to which aggregate demand falls in the initial period. As noted in the first part of this section, a quite considerable initial decline in output, owing to both of these factors, was experienced by most of the transition economies, since many of them had highly interdependent economies in the pretransition period, and they all began their transition at roughly the same time (1990–92). This part of the section reviews the evidence on how much reallocation and restructuring has occurred.

Given the exaggerated priority placed on industry (particularly heavy industry) and the relative neglect of services in most centrally planned economies, it was of course no surprise that with the liberalization of economic activity the output decline that did occur was particularly severe in industry. Indeed, for 17 of the 25 countries for which sectoral output shares (at current prices) could be calculated for five or more years during the transition, the share of industry in GDP in this period fell by an average of 9½ percentage points, while the output share of “market” services increased by 7½ percentage points (Table 4).15 No doubt the actual increase in the share of the latter was even larger, since this is where the highest proportion of unmeasured economic activity was most likely. Some 80 percent of this shift in output shares took place, for most countries, during the period of output decline. This suggests that by the time recovery began, a considerable part of the relative price changes and their intersectoral reallocation consequences had already taken place, reflecting the early stages of the transformation process outlined in Section II. During the recovery phase, by contrast, the growth in output tended to be more broadly based.16

The transition period has also witnessed a considerable shift in employment shares, with the share of industry declining by 10 percentage points for the 16 transition countries for which five or more years of data are available, while the recorded share of “market” services increased by 3½ percentage points (this low value is almost certainly an underestimation—due in part to serious classification problems in individual country data, and to the measurement problems with respect to the unofficial economy as noted earlier). By contrast with the change in output shares, however, the decline in the employment share for industry has been more evenly divided between the output decline and recovery phases (see Table 4), suggesting that labor shedding by industry—while perhaps sluggish at first in relation to the output decline, as many enterprises still did not face hard budget constraints—has been an ongoing process.

Table 4.

Average Change in Output Shares (at Current Prices)

(Percentage points)

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It is quite likely that much of the resource reallocation in the wake of liberalization and in the face of hardening budget constraints has been even more pronounced at the intrasectoral and intrafirm levels, but data in this respect are either not available systematically or have only begun to be analyzed (Box 3).17 A measure of sectoral employment shift across about a dozen sectors (which differ by countries), based on Lilien (1982), reveals that intersectoral employment shifts during the transition period were particularly large for many of the BRO. where possibly the initial distortions were greatest, and for countries (such as Albania, the Kyrgyz Republic, and Tajikistan) in which employment shares rose particularly strongly in agriculture. An indirect reflection of changes at the detailed sectoral or firm level is the change in trade patterns. This evidence suggests that the more advanced reformers have experienced greater changes in product composition—that is, greater resource reallocation (Box 4 and Table 5).18

Privatization, Restructuring, and Performance

The earliest surveys of enterprise performance were done for Polish state-owned enterprises (Pinto, Belka, and Krajewski, 1993) and found, surprisingly, a considerable amount of restructuring and improvements attributed to a strong hard-budget discipline. Most later studies generally found that state enterprises are less efficient, have excess labor and higher wages, and tend to accumulate losses (Galal and others, 1994; Frydman and others, 1997). Pohl and others (1997), using 1995–97 survey data for several thousand privatized and state-owned firms from seven eastern European countries, show that, on average, privatized firms have total factor productivity growth as high as 4–5 percent, five times higher than still state-owned enterprises even when one controls for the degree of bank lending and subsidies, and other country-specific conditions. Privatized firms reduced their labor force by 20 percent more than comparable state-owned firms, and ceased to receive direct government subsidies. A study of the Russian privatization program (Earle and Estrin, 1997), using data for 439 state and privately owned manufacturing firms finds strong evidence of positive effects of private ownership on several measures of enterprise performance. Roberts, Gorkov. and Madigan (1998) find similar results for a panel of Kyrgyz enterprises.

Other studies examine how ownership type affects performance. A detailed survey of case study evidence (Carlin, 1995) shows that firms owned by foreign investors perform best, but there is little difference between local insider- and outsider-dominated firms. Frydman and others (1997) and Konings (1997a. b) find that new private firms outperform other types of firms in growth and job creation, but outsider-privatized firms do not outperform insider-privatized firms. Smith, Cin, and Vodopivec (1997) find that foreign-dominated enterprises have a 3.9 percent higher growth in value added than other types of firms, while employee-owned firms have a 1.4 percent higher than average growth. The explanation of such differences lies in application of hard budget constraints. Continued direct subsidies, imprudent bank lending, write-offs of bad debt by the government, continued use of interenterprise arrears, and reliance on barter all retard enterprise restructuring; further, it may be rational for managers to spend more time lobbying the government for support rather than to undertake painful restructuring measures. The empirical evidence suggests that “enterprises subjected to financial discipline show more aggressive collection of receivables, a closer link between profitability and investment, and a reorientation of goals from output targets to profits” (World Bank, 1996a, p. 45). But soft budget constraints are not necessarily restricted to state-owned units and can be provided in ways other than direct government subsidies. Schaffer (1998) uses cross-country evidence to show that governments use tax arrears to keep loss-making enterprises afloat. Also important is the degree of competition enterprises face, though the existing empirical evidence is still limited. Djankov and Hoekman (1996, 1997) found that for Bulgaria import competition had no significant effect on productivity growth since it was offset by soft credits to the affected firms; however, market structure has a significant effect on productivity changes. A recent study of Russian manufacturing firms in the period 1992–94 (Earle and Estrin, 1997) found a positive correlation between import competition and several enterprise adjustment indicators (labor productivity, total layoffs, new product lines), but the study failed to find an effect on enterprise performance of domestic product market structure. Konings (1997a) finds that for Hungary and Slovenia competitive pressure (measured by a market concentration index) has a positive impact on performance, as does the degree of outsider ownership. An interesting hypothesis to explain the mixed results on effects of ownership type is suggested in Earle and Estrin (1997): the insider choice method of privatization in Russia resulted in a selection of best firms for insiders; consequently, they perform better overall on the basis of better initial conditions.

Trade Patterns and Transition

The transition process should be reflected in a major economic restructuring and reallocation of resources. Because these changes are the basis of growth and are likely to precede it, any evidence of how much reallocation has occurred would be an important measure of progress. Unfortunately, apart from some broad patterns of sectoral shift described in the text, there is as yet little information on such changes at the firm level that reflects the “1,001 different ways” of restructuring costs and increasing productivity that Harberger (1998) describes as the heart of the growth process. Comprehensive firm-level surveys are only now being undertaken, and as yet it is too early to observe results for more than a few countries.

However, international trade data detailing as many as several thousand product lines could provide an early reflection of structural changes. A number of recent studies have used such data—particularly trade with the EU and other advanced economies, since these are more reliable and in any event likely to capture the bulk of changes in trade patterns (see Table 5). Two common themes characterize these findings.

First, substantial change is observable in the diversification of trade both toward new markets, especially advanced economies, with less emphasis on exports of heavy industrial goods and machinery and more on new products with increased specialization at the fine level of product detail (see references in Table 5).

Second, the degree of such change varies considerably across countries and appears to be closely correlated with progress in reforms. But even in those countries more advanced in transition, it appears that considerable room still exists for further restructuring. Thus, for the Czech Republic. Hungary, and Poland, the pattern reflected by measures of revealed comparative advantage was by mid-1995 moderately different from that in 1992 but not strongly so (correlations of 0.58 to 0.65); for Russia, the correlation was 0.76. Note, for comparison, the change for Spain (the correlation over this time period is 0.88).

Table 5.

Trade Pattern Changes: Selected Indicators1

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Sources: EBRD (1997); Brenton and Gros (1997); Djankov and Hoekman (1996, 1997); Havrylyshyn and AlAtrash (1998); and Westin (1998)

The Revealed Comparative Advantage index (RCA) for a particular product is the ratio of that product’s share in a country’s total exports, to the product’s share in all global exports; a ratio above I is said to “reveal” that the country has a comparative advantage in the product. A high correlation between RCA values of two years would indicate little change in product structure of exports. n.a., Not applicable.

At the level of the economy as a whole, measured labor productivity has tended to move broadly in line with GDP, although the decline in productivity during the early stages of the transition was in most cases less steep than that of output, since labor shedding was also taking place, albeit, as noted earlier, at an initially slow pace, (Figure 2), Moreover, the end of the output decline tended to be anticipated by either a reversal or at least a more pronounced slowing of the productivity decline (Figure 3). These relationships between productivity and output19 could reflect the general hardening of enterprise budget constraints, which is necessary before recovery can take place.20 By the same token, and indeed as is seen in the cyclical patterns of many industrial countries, the reversal of recovery in many cases was foreshadowed by a dip in measured productivity in the year before the output reversal (see Figure 3), which possibly reflected a softening of budget constraints as the result of inadequately tight financial policies, lack of structural reform, or both. It is probably also significant that the measured overall productivity decline for those countries yet to demonstrate more than little or no growth has not materially diverged from the output path (see Figure 3), suggesting that the shedding of labor—and, by implication, the imposition of hard budget constraints—has lagged significantly in those countries.

Figure 2.
Figure 2.

Average Output and Productivity Indices1

Sources: National authorities; and IMF staff estimates.1 Sample of 15 countries.2Sample of 19 countries.
Figure 3.
Figure 3.

Productivity and Output (1992=100)

Sources: National authorities; and IMF staff estimates.

Although there is some quantitative evidence of a consistent pattern of rapid investment growth in those transition economies for which output has begun to recover, growth appears to have come mainly, at least in the early stages, from increased competitiveness on both domestic and foreign markets from the productivity gains noted above. In this connection, it is probably significant that export growth in the consistent-growth group of countries of CEE and the Baltics has tended to be consistently higher than in the other groups of transition economies (see Table 6, panel E, in Section IV). These high rates of growth, in the absence of any special policy of opening up Western markets to transition exporters, suggests that, in addition to appropriately tight macroeconomic policies and structural reforms fostering competitiveness, foreign trade liberalization has also been important in promoting rapid export growth. A demand-driven recovery is also possible—at least in the short run—without a significant restructuring of output. Indeed, some countries have benefited from a revival of demand for many of their traditional products in neighboring transition economies (for example, Belarus’ rapid export growth to Russia in 1996–97).21

As regards investment, there is little disagreement in the general growth literature that it is a major engine of growth in the medium to long term. In the short run, however, and especially in transition economies with a history of excessive capital accumulation and its inefficient use (see Easterly and Fischer, 1995), the role of new investment in the initial recovery phase may be relatively less important. Unfortunately, investment data for most transition economies are generally not very reliable, and this hypothesis is difficult to test. Available data present a suggestive but incomplete picture. Of the 16 countries that have shown consistent growth, 13 have adequate data on investment. For these it is notable that the most common pattern for the ratio of investment to GDP is a decline from the central planning period levels of 30 percent and more to near 20 percent or even lower (Figure 4). Second, a sustained upturn in the ratio of investment to output preceded the recovery in only one case, while it coincided with the beginning of recovery in three countries and actually lagged the upturn in output in nine cases. Third, for nine of these same countries for which real investment growth data were available, there was roughly an even split among the number of countries for which the sustained recovery of real investment led, coincided with, or lagged the recovery of real output. Fourth, econometric analysis of growth determinants does not show the usual positive effect of investment on GDP (Wolf, 1997; and Annex III). At the same time, however, the survey of IMF country economists (Annex II) and Figure 4 suggest that countries that have entered into consistent growth appear generally to have maintained a relatively high level of broad-based investment during the transition process.22 A plausible way to reconcile all this evidence would be to conclude that, although aggregate net new investment may not be that important in the initial recovery phase, it becomes increasingly more significant as the recovery is extended.23

Figure 4.
Figure 4.

GDP and Investment

Sources: National authorities; and IMF staff estimates.
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