Defying the odds: initial conditions, reforms and growth in the first decade of transition

This paper investigates the relative importance of three sets of factors – initial conditions, macroeconomic stabilisation and structural reforms – as determinants of growth in transition economies during the first 10 years. The paper has two main results. First, average growth over the last 10 years was substantially determined by initial conditions, both directly and indirectly through their impact on structural reforms. Second, controlling for different starting points, there is strong evidence that reforms pay off, while the effect of initial conditions tends to diminish over time. In addition, we find that stabilisation measures are important for growth but there is little evidence of a feedback effect from growth to reforms.