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

This paper asks whether countries that defied the odds and reformed more extensively rhan predicted by their initial conditions and the typical time pattern of transition reaped benefits in terms of higher growth rates. We find that, over the entire period, initial conditions dominate the impact of reforms on growth. Our panel results lead to several interesting new conclusions. First, the positive impact of reforms on growth found by most existing studies as sensitive to simultaneity bias. Second, in a simultaneous equations system. the impact of reforms on growth is nonlinear having a negative contemporaneous effect and it positive effect with a 1-year lag. The overall effect is sensitive to the choice of starting points in the transition. Third the impact of reform is also nonlinear in levels, with the first steps yielding greater benefits than subsequent reforms. Our results show that the positive impact of reforms on growth in the transition economies is less robust than previously thought.